The TMX Group has long dominated much of the plumbing that makes up the country’s capital markets system. In recent years, a number of companies popped up to loosen the company’s grip and bring more competition to the market. But now a bid from nine of Canada’s top financial institutions could tighten control even further.
Four banks and five pension funds announced a bid for the TMX Group in a deal valued at $3.6 billion. If successful, the banks and funds would own 25% and 35% of the company respectively, thwarting a proposed merger with the London Stock Exchange Group. That deal, billed as a merger of equals, raised concerns that Canada would lose authority over its capital markets to a foreign entity. The TMX’s new suitors clearly have patriotism in mind, naming their corporate vehicle the Maple Group Acquisition Corp.
Bank-owned brokerages were among the owners of the Toronto Stock Exchange up until 2002, when it was demutualized and taken public as part of a worldwide trend toward independently owned exchanges. Alternative trading systems also launched in recent years to give investors another venue to buy and sell shares listed on the TSX and TSX Venture exchanges, charging less than the system operated by the TMX. The most powerful of these newcomers is the Alpha Group, backed by the big six banks. Last year, Alpha even announced plans to launch a new exchange to compete with the TMX by this fall, and debut a derivatives exchange sometime after that. But under Maple’s bid, which has many of the same backers as Alpha, the company would be folded into the TMX, reducing competition and putting more control back with the banks.
“My concern is that potential conflicts on interest become real conflicts when concentration rests in the hands of trading entities,” says Tom Caldwell, chief executive of Caldwell Securities, a major shareholder in the TMX. As both users of TMX services and part-owners, the banks may be more concerned with their own interests—lower trading fees, for instance—than supporting the growth of the TMX, as would be the case if it merged with an larger independent player like the LSE. “Banks do not build industries. They destroy them,” Caldwell says.
The Maple bid also calls for folding CDS Inc. into the TMX. Currently, CDS serves as a non-profit trading clearing house operated in partnership with the banks and the TMX. Some worry the proposed ownership structure may enable the TMX to charge for these services. “Presumably the intention is to take this critical service and integrate it into the TMX’s renewed value proposition in an effort to extract some form of monopolist rent,” says Ian Bandeen, CEO of the Canadian National Stock Exchange, which operates an alternative trading platform.
To successfully integrate Alpha and CDS, Maple needs approval from the Competition Bureau. Luc Bertrand, vice-president of National Bank of Canada, one of Maple’s backers, downplayed competition concerns in a conference call with media, adding the combined resources of the venture will allow the TMX to compete on an international level and recapture lost trading volume. Indeed, much of the trading in dual-listed Canadian companies takes place on U.S. exchanges. Bertrand said as much as 80% of the daily volume in Potash Corp. shares happen in the U.S., for example. “So if someone tells me there’s no competition,” he said, “I think I can prove there is in fact a lot of competition.”