The TSX Group has agreed to merge with the Montreal Exchange Inc. (MX) in a C$1.3 billion deal that will create an integrated, multi-asset class execution venue for equities and derivatives in Canada.
“I think the combined group will be a technology powerhouse as well as a product powerhouse in view of its multi-asset class and multi-business lines capabilities,” comments Jackie Chung, president of Competitive Metrics, Inc., a strategic research and advisory firm in Toronto focusing on the Canadian financial industry.
The combined entity to be known as TMX Group is expected to offer cash equity and derivatives trading under one roof, as well as bond trading as the TSX Group engages in an estimated 25 percent of Canada’s bond trading through its holdings in entities such as CanDeal, an electronic bond trading system, says Chung.
MX offers trading in standard financial derivatives products on its proprietary technology platform both in Canada and abroad. Montreal is part owner of the BOX (Boston Options Exchange), which is known for its fast technology, notes Chung. “Now the TSX can lean on the Montreal Exchange,” she says. “Of course in the last two years, the TSX has spent a lot of money on developing technology and making a lot of enhancements,” says Chung.
The merger is happening a year before a memorandum of understanding is due to expire in March of 2009, which bars Toronto from entering the derivatives trading sector until that date.
The decision to join forces also comes on the heels of competitors launching six alternative trading systems for Canadian equities over the past two years, notes Chung. The brokers are banding together to launch Project Alpha in 2008. Meanwhile, Perimeter Group (BlockBook) has launched a second ATS for trading retail-size orders and Instinet Chi-X Canada is entering the market next year. Already, Liquidnet Canada, Investment Technology Group’s TriAct Canada Marketplace with MATCH Now and Bloomberg TradeBook, are operating electronic marketplaces, all of which pose threats to the TSX.
If the deal is closed as anticipated in Q1 of 2008, the combined TMX Group will enjoy both the Montreal Exchanges powerful derivative trading platform and the TSX’s Quantum cash equity platform that is planned for launch imminently, says Chung. Toronto will also gain access to Montreal’s clearing operations since Montreal owns a derivatives clearing corporation. The lack of clearing was a shortcoming for Toronto, says the analyst.
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