Should TMX Try To Buy Alpha To Eliminate Competitive Threat?
Wednesday, May 19, 2010
By Ben Dummett Of DOW JONES NEWSWIRES TORONTO (Dow Jones)
Since TMX Group Inc. (X.T), operator of Canada's largest stock exchange, is losing stock-trading market share to Alpha Group, some suggest that the best course of action for TMX Group would be to buy all or part of Alpha.
Alpha, owned by Canada's six biggest banks, plans to increase the attack on TMX by becoming a full stock exchange, in an attempt to take away listings and listing fees. The purchase by TMX of part or all of Alpha would accomplish three objectives: (1) help TMX stem the loss of market share in trading; (2) quantify the value of Alpha for its investors; and (3) help TMX regain the support of Alpha's bank shareholders.
TMX has played down the potential threat to its listing business by a new exchange, citing its established brand and experience. However, in today's environment of multiple markets, companies may be more willing to consider listing on Alpha since trading rules require brokers to send stock orders to the market offering the best price regardless of where the stock is listed, some industry observers said.
In Toronto Tuesday, TMX's stock closed at C$27.58, near its 52-week low of C$27.55, partly because of investor concerns over Alpha.
Some ATSs, inside and outside Canada, were started by the dealers out of frustation over the high fees charged by the incumbent exchanges. Some exchanges have responded by looking for ways to regain the dealers' support to protect their businesses, particularly when they face competition from other ATS operators.
For example, London Stock Exchange Group in December acquired a majority stake in Turquoise Trading Ltd., an alternative exchange, in part to help it regain the support of Turquoise's investment-bank shareholders.
"You have seen a bunch of the incumbents in the U.S. and Europe now start to embrace a trend of remutualization," said Justin Schack, a director and market-structure specialist at Rosenblatt Securities Inc. in New York. He wasn't commenting specifically on TMX and Alpha.
Similiar deals include the sale by NYSE Euronext of a stake in its AMEX options market as well as in its futures market in the U.S. In addition, IntercontinentalExchange Inc. has a profit-sharing agreement with major credit-default-swap dealers for its clearing operations for credit-default swaps.
Because Alpha has been much more successful than Turquoise, Alpha would face less pressure to do a deal, industry followers said.
A TMX spokeswoman declined comment on the possible purchase of Alpha.
"I am not aware of any developments of that nature," said Jos Schmitt, Alpha's chief executive, when asked about a possible deal with TMX. "We should never forget that we faced a non-regulated, for-profit monopoly," which spurred development of ATSs, so "you don't buy a problem away," he said.
A TMX-Alpha tie-up could make it more expensive to trade, by eliminating a key competitor. That could result in more business for Canada's other ATSs -- Chi-X Canada, Pure Trading and Omega ATS, which have also helped to reduce trading fees. Further, an Alpha acquisition could entice new competition to enter Canada. BATs, a big U.S. equity exchange, has already indicated it might consider coming here.
Alpha is Canada's biggest ATS, accounting for more than 20% of the average daily trading volume of stocks listed on the Toronto Stock Exchange, the country's senior exchange. Alpha benefits from the volumes it receives from its shareholders, as Canada's big banks dominate trading activity in Canada.
An acquisition by TMX of Alpha could appeal to these bank-owned dealers if they received board representation as part of any transaction to ensure their influence over trading and data fees, some suggested.
Those who argue against a TMX purchase of Alpha say TMX would limit the involvement of Alpha's shareholders at the board level, so the banks' influence on TMX would be short-lived.
-By Ben Dummett; Dow Jones Newswires; 416-306-2024; ben.dummett@dowjones.com
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