Tmx Group Inc. has responded to increasing competition in the alternative trading systems business with a proposed new ATS of its own. The new platform, to be called TMX Select, will launch in early 2011.

The launch of TMX Select is part of an overall plan by Toronto-based TMX Group to reclaim its diminishing share of the domestic securities trading market and to grow revenue abroad.

Over the past year, the competitive muscle of TMX Group, which operates the Toronto Stock Exchange, the TSX Venture Exchange and the Montreal Exchange, has been seriously challenged. Rival exchanges such as Alpha Trading Systems LP and Chi-X Canada ATS Ltd., both based in Toronto, have taken significant chunks of business away from TMX Group. Since arriving on the scene in late 2008, these ATS competitors have captured more than a quarter of the TSX’s and the TSXV’s combined domestic trading market share.

By launching TMX Select, TMX Group is hoping to reclaim some of that lost market share. Kevin Cowan, president of TSX markets and group head of equities, is adamant that TSX Select will succeed: “We are going to fight tooth and nail for every percentage we have lost and get it back.”

TMX Group says the new platform is ready to start; the only hurdle that remains is regulatory approval, which is expected to be complete by the middle of 2011.

“We have different customers with different strategies and preferences,” Cowan says, “and we want to be able to service all of those customer needs rather than sending them to a competitor. That’s a rather standard competitive behaviour.”

This isn’t TMX Group’s first attempt at a high-frequency trading platform. In early 2008, it released TMX Photon, a higher-speed alternative to the TSX’s main engine, TMX Quantum.

Photon failed to attract business because it was not adequately differentiated from the TSX proper. People in the industry regarded Photon and the TSX as the same entity, says Torstein Braaten, CEO and chief compliance officer with Toronto-based TriAct Canada Marketplace LP. “It makes practical sense to launch TMX Select and separate the two platforms,” he says, “in order to attract the market each one is looking to serve.”

Since Photon’s failure, Cowan says, TMX Group has invested heavily in upgrading the TSX’s main technical infrastructure to enable it to offer the speed of an ATS platform.

TSX Select’s high-speed trading platform will run separately from the TSX and the TSXV, offering clients expanded trading hours, a simplified market structure with no special terms and a strict price/time priority for over-the-counter orders. The new platform also will focus on transparency by publishing all of its trading information — something Cowan says will set TMX Select apart from other ATSes.@page_break@Price/time priority is nothing new. It’s a feature that sequences trades based on the price at which they come in — a feature Chi-X Canada already has. If two trades come in at the same price, the trading engine will process the trades in the same sequence as the orders’ time of arrival.

On the surface, there may be no apparent reason for a client to choose TMX Select over another ATS, Braaten says: “But below the surface, they could take advantage of the ‘order protection’ rule.”

The recently enacted order protection rule, passed by the Investment Industry Regulatory Organization of Canada, could give TMX Select a distinct advantage over other ATSes. This rule essentially requires that trades be executed at the best price for the client and, therefore, be routed to the marketplace that offers that price.

If all markets are offering the same price, TMX Group has the advantage, because it has more liquidity — more players competing to make that trade. “Because of the order protection rule,” adds Braaten, “you have to go where the most active flow is to get that best price.”

From an international perspective, the new ATS platform will help the TSX and TSXV attract foreign liquidity. “As international players increasingly trade in Canada,” Cowan says, “having more products and services and having alternative platforms will certainly appeal to those customers and will help us grow our international and domestic business.”

The TSX, in developing its international business, has signed an agreement with Norwegian exchange Oslo Bors to expand the marketing for the TSX’s international listings business, with a specific focus on mining companies, as well as to expand its resources for gathering information on companies looking to list on the TSX.

It’s a mutually beneficial partnership in which “one and one equals three,” says Ungad Chadda, senior vice president of TSX. “Sharing information is critical for exchanges, since we have quality-control standards.”

The agreement with the Oslo Bors, still in its early stages, could lead to a more formal arrangement in which the Norwegian exchange and the TSX run marketing programs together. The TSX has similar agreements with exchanges in Israel, Shanghai and Brazil.

TMX Group also has made inroads in China, Latin America and Australia with its international listings business. That listing business brings in about 28% of the company’s revenue.

For the six months ended June 30, 2010, the listings business brought in $80.3 million in revenue — a significant increase from the $42.3 million that line of business had brought in for the same period in 2005.

The combined volume share of the Canadian equities trading market held by TSX and TSXV for the quarter ended June 30, 2010, fell to 72%, compared with the 89% held for the same quarter in 2009. Much of that share was lost to Alpha, which held 20% of the market for the 2010 quarter, an increase from the 6% it held during the same period in 2009.

With so much competition on the home front, it only makes sense that TMX Group is looking for more partnerships abroad, says Etienne Phaneuf, managing director of sales and trading with Toronto-based ATS ITG Canada: “It’s the first of many moves.” IE