‘If the TSE went dark, would it really matter?’: What the future holds for Canada’s stock exchanges

As many as 38 of the 240 companies on the S&P/TSX composite index – the preeminent benchmark tracking the performance of Canada’s largest companies – were trading below $5 this week.

In short, up to 15.8 percent of the country’s dominant index, an essential indication of the country’s economic might, could be considered anything stock of all major U.S. exchanges, according to rules set by the U.S. Filing.

Depressed values for commodities and also the collapse in oil prices to 12-year lows have severely crimped the performance of the S&P/TSX composite and decimated the S&P/TSX Venture composite index, which in mid-January sank to the lowest level ever.

It’s less an identity crisis around it may be a struggle for survival.

Given its unfettered dominant position at home, this really is unchartered territory for TMX Group Inc., which owns and operates the Toronto Stock Exchange and also the Venture and Alpha stock markets. Even before it became a for-profit company in 2000, its relevance and longevity have never been seriously questioned or tested.

But since a consortium of 13 major Canadian financial institutions comprising the Maple Group Acquisition Corp. completed the $3.8-billion acquisition of TMX Group in September 2012, the nation’s major exchange operator appears to have been a national institution in search of a method.

“The TMX finds itself inside a perfect storm where commodity markets have collapsed and volumes have dried out on most exchanges,” said Ian Russell, chief executive from the Investment Industry Association of Canada. “It’s less an identity crisis around it might be a struggle for survival.”

The TMX Group’s identity was forged in the aftermath of a failed proposed merger using the London Stock market. After the merger was defeated in 2011 by the Maple Group, sending the pesky foreigners packing about $38 million in break-up fees, a made-in-Canada solution predictably ensued.

Essentially, its formula prescribed a continued focus on resource listings, with some major blue-chip financials, such as the banks, telecommunications and transportation giants mixed in for balance – a formula some still have confidence in.

“We have a world-class exchange in this country,” said Richard Nesbitt, leader at the Global Risk Institute for Financial Services and former leader from the TSX Group Inc. who had been the type of leading the campaign against selling to the LSE.

Even now, almost eight years removed from the TSX, he maintains that the exchange, despite its challenges, is “the class from the field among the eight or 10 smaller exchanges in terms of servicing its customers, and in some industries, like mining and SME finance, it is world beating.”

“World beating,” however, isn’t how global investors would characterize the Canadian exchanges, which have lagged other exchanges because the 2008 economic crisis. As a result, inevitable questions about the relevance of the Toronto Stock market and its sidekick junior listing venue are now burbling.

“If the TSE went dark for a week, would it really matter?” asks an old Canadian regulator who spoke around the condition of anonymity. “In yesteryear 10 years, the earth has been populated with countless smaller exchanges. It’s hard to state, but my sense is (the Toronto exchange) is just not as vital as it was previously.”

That insufficient vitality is reflected in TMX Group’s numbers. The company posted a $159-million reduction in the fourth quarter of 2015, or $2.92 loss per share, based on results released Feb. 11. Meanwhile, its shares reached their nadir at the end of 2015, but have modestly started to rebound from last year’s 30-per-cent drop.

It’s also reflected within the insufficient activity on its markets. Total financings on the Toronto Stock Exchange fell 33 percent in January compared to the same month last year while cash equity volumes declined 22 per cent.

The Venture Exchange, meanwhile, has fared much worse. Total financings plunged a whopping 74 percent recently from the same period in 2015.

Overall, TMX Group’s revenue declined three per cent within the fourth quarter – with the only bright spot being market data sales, a big part of the company’s strategy going forward, which climbed nine per cent.

Accustomed to the insular view, competitive pressures are finally pushing the Canadian exchange operator out of its safe place.

For one, major exchanges such as the Nyse, Nasdaq and also the Tokyo Stock Exchange have previously consolidated other smaller exchanges to create more heft to attract more listings. A lot of Canada’s biggest companies are also interlisted on U.S. exchanges.

The TMX Group is not in those big leagues now – and in all likelihood never was. “We claim to be a worldwide financial centre, (but) we’re not really. We’re more a parochial financial centre,” said the former regulator.

The Canadian exchange operator must also now contend with countless smaller exchanges, such as dark pools, as well as local and regional exchanges rising in emerging markets that provide higher governance standards along with other niche opportunities that attract investors.

Even in the own backyard, TMX Group’s dominance, including about 70 per cent of the country’s equity trading volume, has been challenged.

U.S. giant Nasdaq Inc., with former TMX chief executive Thomas Kloet now on its board of directors, has arrived on TMX Group’s home turf through the purchase of Chi-X Canada, an alternate trading system that competes directly using the Canadian exchanges for volume.

It may be worth noting that Nasdaq’s main U.S. exchange hosts four of the most popular technology companies on the planet – Apple Inc., Alphabet Inc., Microsoft Corp. and Facebook Inc. – which together have a market value of near to US$2 trillion, dwarfing Canada’s entire US$1.6-trillion equity market.

At the same time, Aequitas Innovations Inc.’s Neo Exchange is challenging around the Canadian data front. The upstart filed a complaint using the federal Competition Bureau alleging TMX Group is using anti-competitive practices and its dominant market position to manage pricing on data.

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To be sure, TMX Group has been slow to reply to the difficulties. The stocks of its global exchange peers – London Stock market Group, Deutsche Borse AG and Spain’s Bolsas y Mercados Espanoles – all currently trade at a higher multiple, as much as 15 times earnings, than the TMX Group.

But belatedly, if not reluctantly, the Canadian exchange operator has realized that it must navigate this new world of competition for investor curiosity about its listed companies as well as for new listings.

“The TMX today is not the TMX of a last year and also the TMX next year will not be identical to the one today because the markets and our clients are changing,” said Lou Eccleston, the business’s American leader who’s leading the overhaul. “But a minimum of we go into 2016 ready for the change, whereas this past year, I couldn’t have said that.”

Eccleston, an old executive at Standard & Poor’s, Thomson Financial Corp. and Bloomberg LP, was hired in November 2014 to reverse the red tide. His major initiative has been to launch an unprecedented and sweeping overhaul dubbed “The Pillars for the Growth.”

Finding the right direction in a choppy market is hard to do.

Unveiled at the end of 2015, it is a blueprint that outlines how the exchange operator promises to shed the yoke of the old Maple group model as an infrastructure provider and transform itself into a provider of client services while investing in new products, for example data mining and analytics.

According towards the plan, the future TMX Group will concentrate on commercializing its services, winning back some of its lost equity-trading share of the market, shedding non-core assets and, especially, expanding the TSX Venture beyond its traditional concentrate on resources and into technology.

Even so, the TMX are not committed to shun its bread and butter. “The resource franchise in Canada is crucial,” Eccleston said. “Technology is really as important for the near future as resources have been and then be for Canada and that we need to do both moving forward.”



Industry analysts are skeptical Eccleston can deliver with that ambitious blueprint.

“Finding the best direction in a choppy market is hard to do,” said Paul Holden, an analyst at Canadian Imperial Bank of Commerce, in a Feb. 15 note to clients. “We are not so clear about execution towards developing a digital company, a more efficient company and a more client centric company.”

The analyst, who keeps a $50 price target on TMX Group shares, wants to see more specifics on things such as revenue diversification, as well as new revenue opportunities and growth prospects. Until then, “we don’t have enough confidence around new initiatives to recommend jumping into the stock today -,” he said.

Others on Bay Street echo that sentiment. Shubha Khan at National Bank Financial on Feb. 15 reaffirmed his “constrained” outlook on TMX Group’s future prospects and also the stock’s $40 target.

Khan said inside a note that TMX Group’s current large valuation discount to its global peers “is unlikely to narrow” due to the collapse and continued weakness in the resource sector, the entry of Nasdaq in to the Canadian marketplace and also the added costs from the realignment. “We believe a narrowing of the discount appears rather unlikely soon.”

In the end, Eccleston might not have much wiggle room to construct a strategic plan that’s both compatible with a Canadian marketplace that relies on the commodities and sectors, and quickly delivers a profitable future in technology and data.

“In the short run, there isn’t a magic bullet to fix the TMX Group’s problem,” said the IIAC’s Russell. “He [Eccleston] is proposing a long-term strategy that will take a long time to bear fruit. There’s no easy way out and shareholders will be tied to it.”

ttedesco@nationalpost.com