TMX plans U.S. expansion as equity financing deals continue to slump

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Canada’s biggest stock exchange operator is expanding into the United States in a direct challenge to its much larger American rivals, as it deals with a still-moribund equity financing environment and mounting competition from U.S.-backed competitors in its home market.

TMX Group Ltd. X-T, which owns the Toronto Stock Exchange and TSX Venture Exchange, disclosed plans to take the fight head on to the likes of the New York Stock Exchange and the NASDAQ during a Tuesday conference call with analysts.

“The quality of our offerings can compete with any of the North American players in their home market just the same way they compete in the Canadian market,” said John McKenzie, the TMX chief executive officer, in response to a question on whether the plan was still exploratory or already fully defined.

“We haven’t had broad discussion in public yet, so I’m going to be a bit more limited in terms of what we share today,” Mr. McKenzie said. “But it is definitely more than what I would call experimentation.”

Part of the southward expansion is already underway. Last month, TMX hired Wall Street veteran Heidi Fischer as its first president of U.S. equity trading. Based in New York, Ms. Fischer has been tasked with building a team that will soon start to woo American institutional investors.

Those investors will be pitched on the merits of the Alpha-X/Alpha-DRK platform, which TMX launched in Canada last week. Both are “premium services” that “aren’t the kind of low-cost continuous order trading that we trade in the regular book,” Mr. McKenzie said in an interview Tuesday.

“People that are doing large institutional trades where they don’t want to have visible exposure and they don’t want to tip off the market so that they aren’t creating market movement with them. This gives us more capability to serve those large block trades,” he said. “The big Canadian banks, for example, have big flows back and forth across the border.”

That, however, is only step one of a multidecade strategy for TMX to eventually generate most of its revenue from outside of Canada.

“If we start with a small marketplace, you can see how we could potentially expand that to be a full exchange that would allow you to do potentially posting or listing or cross-border ETFs,” Mr. McKenzie said. “All the things that we can do in Canada, we can do in the U.S.”

Jaeme Gloyn, who covers TMX for National Bank Financial, said he likes the approach the company is taking toward the U.S. market. While noting TMX has not yet disclosed enough details for analysts to assess the long-term viability of the strategy, Mr. Gloyn said in an e-mail that he specifically liked the idea of “starting small with a focused product that has demonstrated a clear advantage in TMX’s home market.”

A prolonged stock sale slowdown has led to falling revenues in some of TMX’s core businesses. Capital formation revenue fell 4 per cent on a year over year basis, according to the third-quarter results TMX reported after markets closed Monday.

But so far, the company has managed to more than offset those declines by posting double-digit growth in its data and analytics division, where revenue jumped 19 per cent in the third quarter compared with the same period in 2022.

Meanwhile, TMX has faced increasing levels of competition on its home turf with Chicago-based Cboe Global Markets Inc. buying the upstart NEO Exchange in 2021 in hopes of becoming the Nasdaq of the North. And earlier this year, the junior Canadian Securities Exchange launched a senior tier to attract larger companies to its platform.

TMX already competes “head to head” with the major U.S. exchanges for new listings, so “this idea is actually doing it across the border directly,” Mr. McKenzie said.

“When we compete in Canada we actually compete with both NASDAQ and Cboe and we do really well,” he said. “So this would be about taking our competitive position to another level.”