TMX chief sheds his local politesse

For the past year, Tom Kloet, the American who came north in 2008 to run TMX Group Inc., has been acting awfully Canadian, refusing to say too many bad things about his main competition in the stock-exchange game. No more.

No longer confining himself to quiet grumbling that regulators have been too easy on the upstart stock-trading systems such as Alpha that are stealing market share from TMX's Toronto Stock Exchange, Mr. Kloet is now going after what he views as a much bigger issue: the inherent conflict of interest presented by the country's big securities firms owning Alpha.

He's calling on regulators to look at whether securities dealers, including RBC Dominion Securities Inc. and TD Securities Inc., should be able to control an exchange. As the biggest equity traders, the firms could, in theory, manipulate trading by directing clients' buy and sell orders to Alpha - even if it's not in customers' best interests to do business there.

RBC Dominion, TD Securities and a group of banks launched Alpha with the goal of driving down trading costs by creating competition for the TMX, but also with an eye to creating a profitable business that could some day be sold for a big gain, much as they did when they sold the TSX to investors.

In a speech at the Canadian Club of Toronto, Mr. Kloet warned that the Canadian marketplace risks returning to what it had before the TSX was spun out of the banks - "back to the days when trading venues and exchanges were owned by select participants with conflicted interests and an ability to work in concert."

"For the capital markets to continue to evolve in the best way, absolutely, parties with conflicted interests shouldn't control exchanges," he added later.

That's a significant increase in decibel level for Mr. Kloet, who takes pains to stress that he doesn't see any evidence that there is hanky-panky in markets. But the possibility that it could happen reduces confidence in the country's stock markets.

"I'm not suggesting anybody's manipulating, but that's the danger that's out there."

Mr. Kloet is in a tough position; anything he says about Alpha could be interpreted as grousing about a rival that's hurting his bottom line.

There's also no doubt that Alpha has done good things for the market. Trading fees in general have come down across the Street thanks to the competition for orders, and Alpha is now working to force TMX to cut prices for market data, one of the cash cows for Mr. Kloet. And the introduction of competition with faster trading engines has forced the TMX to be on its toes and innovate to ensure its computers and connections are up to snuff.

Perhaps that's why, for a long time, Mr. Kloet, a Midwesterner who's a bit aw-shucks by nature, has been focusing on a relatively obscure argument that it's wrong that TSX has to jump through more hoops such as a public comment period when it comes to changing its trading rules, while Alpha and the other new entrants can do as they please. He argues it puts the TSX at a disadvantage, and investors, too, because the rulemaking for the smaller markets is less transparent.

The argument, while sensible, has been too technical to get much traction in the media or even with regulators, who have only recently decided to at least have a look at the issue.

"It's a small step in the right direction, but a small step at a time when we need to make strong big steps," Mr. Kloet said.

And that big step, he's implying - though he isn't going so far as to come right out and say it - is to have regulators force the banks to sell down their stakes in Alpha to avoid any appearance of conflict.

"A stronger marketplace model, fundamentally, is where that conflict doesn't exist."

by Boyd Erman @ thegloabeandmail.com