TMX to be merger target?

According to Peter Haynes of TD Securities, the TMX Group is a prime candidate to merge with a global exchange.
Mr. Haynes, CFA, writes in a recently published report, "Toward the end of
2010 and early 2011, the theme of consolidation will once again gain traction
in the exchange space, partly on the back of locking down broader control of
the listings business as the global economy rebounds." This forecast came
only a few days after the TMX's chief competitor, Alpha, applied for exchange
status which would enable the ATS to continue to compete with the TMX for sales
in other avenues, most notably in listing fees.

When Canada's big banks (including Mr. Haynes's employer, TD Securities) and Canaccord Financial Ltd.
launched Alpha in November, 2008, the ATS quickly became the TMX's strongest
competitor for market share and trading fees. Alpha almost immediately started
a price-cutting war which drove down trading fees, benefiting the brokerages
and damaging the TMX's revenues. With the ATS's plan to expand, a merger with a
global exchange could give the TMX an advantage in competing for global
listings. The TMX has already said it does not think Alpha will be as
successful when it competes for listing fees, but if Alpha is as aggressive in
dropping listing fees as it was with dropping trading fees, the TMX's revenues
could dwindle further and a merger may be a viable option for shareholders.

Thomas Caldwell of Caldwell Financial Ltd., a well-known investor in stock exchanges and a large
shareholder of the TMX, recently wrote an op-ed article for the National Post
expressing his disapproval of Alpha's application to become an exchange. He
says the banks, which with brokerage firms owned the Toronto Stock Exchange
before it went public, will become too powerful if they own an exchange. He
said the major banks "now control more than 80 per cent of the Canadian
investment industry." The unhappy investor also writes that Alpha does not
have better technology or delivery systems compared with other ATSs or the TMX,
and its only competitive advantage is its owners. He also says if the
regulators approve Alpha's application for exchange status, they will be
enabling the success of a business competitor with the goal of providing a
place for its owners to trade for next to nothing. He argues, "This flawed
industry model eventually will force investors into the tender clutches of
their bankers for even more of their investment needs," and concludes he
does not want the banks to become that powerful.

In Alpha's most recently published newsletter, it reports that in March, 2010, the ATS traded over four
billion shares. It captured 25.2 per cent of the market share of TSX listings
and 12.2 per cent of TSX-V listings. Just under one year prior, in April, 2009,
the ATS proudly reported a milestone of trading over 725 million shares, five
times less than now. Comparatively, in March, 2010, Chi-X Canada, the second
most active ATS, traded over 700 million shares and captured 5.2 per cent of
TSX stocks, roughly double its amount from a year prior.

In Mr. Haynes's report, he also suspects the TMX will face even more competition by the end of the year,
predicting three to five new ATSs will pop up in Canada in 2010, including at
least two new dark pools.

by Stockwatch Business Reporter