Competition is set to heat up in the Canadian stock-exchange business as Toronto-based Alpha Trading Systems Ltd. has applied for stock-exchange status with the Ontario Securities Commission. The bank-owned alternative trading system expects to become an exchange as early as next year. That will have significant implications for Toronto-based TMX Group Inc.

TMX Group was once considered untouchable. But that is no longer the case. Since Alpha’s launch in November 2008, the ATS, which is owned and operated by the Big Five banks, has steadily captured about 20% of the TMX’s trading volume.

According to the Investment Industry Regulatory Organization of Canada, trading activity for Alpha, measured in volume of trades, rose to 20.5% from 6.3% in the nine months ended March 31. Meanwhile, trading volume at the TMX Group’s Toronto Stock Exchange dropped to 45.5% from 67% in the same period.

TMX Group currently has the monopoly on new listings in Canada for mid- to large-cap companies. The TSX Venture Exchange faces some competition in listing services for small-cap firms from Toronto-based CNSX Markets Inc. But most companies that list on the CNSX have not met the TSXV’s listing requirements.

As far as the fees go, TMX Group charges between $10,000 and $200,000 for a large-cap company, depending on its market value at the time of listing. For small-cap companies wanting to list on the TSXV, fees range from $5,000 to $30,000. Meanwhile, the CNSX, which accounts for about 0.2% of the trading volume in Canada, charges its companies a fee of $10,000, regardless of their size.

Although Jos Schmitt, president and CEO of Alpha, makes no promises about which market Alpha will be targeting for new issues, it won’t be small-cap firms: “What drives us is market demand and, in this space, there is a need for true competition on issues. But we are less interested in the venture environment.”

If Alpha gets approval to become an exchange, it could generate a handsome chunk of revenue. TMX Group brought in $142.1 million in listings revenue for the year ended Dec. 31, 2009 vs $152 million in listing revenue in 2008. Listing revenue accounts for about 26% of TMX Group’s annual revenue.

“I hope we will have a platform launched, realistically, before year end,” says Schmitt, who expects the OSC to approve the application within six to eight months.

But Alpha grabbing a substantial piece of the issuer pie won’t be as easy as stealing share away from the TSX’s trading business. So says Ali Crosthwait, head of research with ITG Canada Corp. , a subsidiary of New York-based Investment Technology Group Inc.: “The TSX has relationships with issuers that go back 80 or 90 years. This is not going to change overnight.”

And although Alpha may not represent a serious threat for the TSX’s listings business in the short-term, TMX Group can’t expect its reputation to carry it forward, Crosthwait adds: “I think it has to compete as though it is competing for its life.”

TMX has been competing for every percentage point of market share in trading and listings, says Kevan Cowan, president TSX Markets and group head of equities. As the sixth-largest exchange in the world in terms of equity raised by its issuers, TMX Group constantly monitors listing fees of international exchanges to ensure it can compete with markets such as Nasdaq and the New York Stock Exchange.

“Part of the reason that we are doing so well is we are giving domestic and international issuers the most important thing they are looking for: access to capital,” Cowan says.

Although Alpha now has 20.5% of the trading volume, it may take some time for it to build a reputation for raising equity to compete with what the TSX can offer new issuers.





@page_break@The TSX and TSXV, combined, have steadily lost market share in the trading business, which has gone mainly to Alpha. Over the past two years, TMX Group’s overall market share (including the TSX and TSXV) has fallen to 73% as of March 31 from 98% in early 2008. But TMX Group has been doing anything but sitting still, Cowan says. It is still invested heavily in improving its trading engines and gateway to offer users faster and better service.

Although Alpha’s move into the listing business may not be good news to TMX Group, it’s good for markets in Canada, says Crosthwait: “Now, you have markets adopting better technology, lower pricing and better functionality.”

This has also given foreign investors a reason to trade in Canada, she adds: “Alternative marketplaces have brought global attention to Canada — and a little bit of competition gets everybody hopping.”

Outside of the listings and trading businesses, the sale of marketplace data is also getting more price-competitive as time goes on.

Although TMX Group was recently designated the information processor for the Canadian marketplace until July 2014, that doesn’t mean ATSes aren’t seeing growth in their data sales. TMX Group collects data feeds from all the markets and then consolidates it, but marketplaces still sell data individually. This puts further pressure on TMX Group to reduce its data prices.

For example, Alpha charges its users 40% less than TMX Group for data on the day’s spreads of its largest equities. “We see substantial growth in this area. It’s becoming a growing part of our revenue, even though we charge a fraction of what TMX Group does,” says Schmitt. “Our goal is to break the back of the cost of market data in Canada, which is absurd.”

When the idea of an information processor was first introduced by the Canadian Securities Administrators, many ATSes hoped for a model comparable to the U.S.’s, in which the Consolidated Tape Association, governed by the Securities Exchange Commission, oversees the dissemination of trading data from all exchanges and platforms trading NYSE-listed or American Stock Exchange-listed securities.

“We were pushing for an information processor in Canada,” says Schmitt. “It lost its meaning when it became TMX Group.”

However, Cowan says, any ATS had the opportunity to bid for the information process spot — but TMX Group won the bid fairly.

As the alternative marketplace industry evolves in Canada, Crosthwait says, it will eventually shift to a more U.S.-like model, in which the processor is run by a specialized organization outside of existing exchanges and trading platforms. “It will be more efficient that way.”

Even if Canada adopts a new model for consolidating data, how much this will impact each ATS’s bottom line remains questionable — although Schmitt expects Alpha will hit 40% share in trading volume over the next two years.

Crosthwait says it’s unlikely Alpha will surpass 30% trading volume, as more ATSes will likely start up in Canada over the next year. IE