Tourists ambling through Toronto’s financial district often stop to snap a photo of the historic Toronto Stock Exchange building on Bay Street. Though dwarfed by the bank towers that now surround it (the art deco facade is actually inset in one of the TD Centre’s sleek, black towers), the building’s imposing stone walls, tall, narrow windows and the detailed frieze that runs above the entrance nevertheless evoke a sense of solemnity and gravitas—the idea that Canada’s capital markets are serious business. The reality of a modern stock market, though no less important, is somewhat less exciting to behold. In the case of the TSX, now part of the TMX Group, most of the action takes place in a humming data centre in suburban Toronto, after the trading floor was officially closed in 1997 (although TMX’s headquarters and a media centre remain in a nondescript office tower downtown).
Now those clusters of computer servers are suddenly the subject of national hand-wringing, after TMX said last month that it plans to merge with the London Stock Exchange in a bid to create a transatlantic player. And among the most vocal opponents have been several of Canada’s big banks. They are calling on Ottawa, which will review the deal, to block the $7-billion transaction, to ostensibly prevent the loss of a strategic national asset. Their powerful voices, as dominant players in Canada’s capital markets, could turn out to be a deciding factor in whether the deal is permitted to go ahead.
Critics say the banks’ protestations are nakedly self-interested. For one thing, the country’s big banks are all stakeholders in a rival trading platform that has helped kneecap TMX’s business in recent years—not exactly the sort of behaviour one would expect from a group concerned about safeguarding a key national institution. At the same time, observers note that in the event of a TMX-LSE merger, the banks are facing the prospect of competing on a more global scale when it comes to offering lucrative brokerage and dealer services. “Now they will be competing not just with Canadian banks and other entities, but with European banks—particularly through London,” says Maurice Levi, a finance professor at the University of British Columbia’s Sauder School of Business.
Exactly how a merger of TMX and LSE would impact banks and other interested parties is currently the subject of much debate, but there’s little doubt that the business of running stock exchanges is quickly and inevitably moving beyond national boundaries. In recent years, the world’s exchange operators have participated in a flurry of cross-border mergers and acquisitions as they seek to cut costs and increase their reach. The TSX itself gobbled up the Montreal exchange and then, in 2001, bought the Canadian Venture Exchange (now the TSX Venture Exchange ). Meanwhile, on the international stage, in 2007 the venerable New York Stock Exchange bought Euronext—itself the result of the merger of three European exchanges—and is now a takeover target of Deutsche Börse. By some accounts, there have been an estimated 600 acquisitions in the industry worth $94 billion over the past 10 years.
While the TMX-LSE deal has been touted as a “merger of equals,” opponents note that 55 per cent of the combined company will be controlled by LSE investors, with TMX’s shareholders hanging on to the remaining 45 per cent—a difference meant to reflect the relative size of the two players. The combined company would be co-headquartered in Toronto and London, with executives split between the two cities (the CEO would be based in London, initially). The exchanges, meanwhile, will continue to be operated separately and remain under the oversight of each country’s national regulators, although there is some talk about making it easier for companies to become dual-listed. “Access to an international and well-established sales and business development organization gives TMX enhanced ability to attract new investors, participants and overall interest to Canada,” Thomas Kloet, the CEO of TMX Group, said in a statement earlier this month.
But at least three of the country’s biggest banks say the move is a grave mistake. The heads of the securities arms of TD and CIBC and the co-CEO of National Bank all signed their names to an open letter that effectively calls on Ottawa to block the deal. “The TMX is a key component of our capital markets,” the banks argue, adding that the newly merged exchange would be less likely to focus on small Canadian start-ups in key areas of the economy. The banks also warn that important business decisions will increasingly be made overseas, and that there are no guarantees that TMX’s influence in the combined company won’t wane over time as future mergers take place. A better approach, the banks say, is to build on TMX’s existing strengths as the world’s leading resource exchange.
The reality, however, is that most exchange mergers have been defensive moves. Once virtual monopolies, operators of traditional exchanges are facing stiff competition from alternative trading platforms, which are run with skeletal staffs and the latest technology. And often the only way to staunch the sliding market share is to get bigger and leaner. “None of this is really very new,” Barbara Stymiest, the former CEO of the TSX and a current RBC executive, told a recent Ontario government committee hearing on the proposed transaction. “As early as 2002, we were meeting with both big and small exchanges in the United States, exploring north-south opportunities.”
What the banks failed to mention in their protest letter is they all banded together to form a rival trading platform called Alpha Group in 2007 (TMX also competes with the Canadian National Stock Exchange). It has since captured nearly a third of the market for stock trading (it does not compete on listings because it hasn’t yet been granted exchange status), largely at the expense of the TSX. While there’s nothing wrong with a little competition, critics have suggested it’s disingenuous for the banks to suddenly turn around and suggest TMX is a strategic national asset in need of protection after they’ve spent five years trying to kick the stuffing out of it. Also curious is their suggestion that TMX ditch its merger plans and think instead about “acquiring other exchanges or electronic matching/trading platforms in Canada or abroad.” Are the banks recommending TMX buy Alpha instead? A TD spokesperson declined to comment, but president of TD Securities Bob Dorrance told the Ontario government committee “our interest in the Alpha Group pales in comparison to our interest in the Canadian financial markets.”
Not all of the banks are singing from the same songbook. RBC and BMO have spoken in favour of the TMX-LSE transaction, although both of them are working as advisers on the deal. Scotiabank, meanwhile, stressed the importance of advocating open markets in a statement to Maclean‘s, but also warned of the need to ensure that Canadian capital markets continue to prosper. CIBC, the country’s biggest trading bank, seems to be occupying similar middle ground. Though a signatory to the letter opposing the deal, Jim Prentice, a former federal industry minister and CIBC’s vice-chairman, has taken a more neutral tone in his statements, talking about Canada’s need to attract foreign capital, though not at the expense of losing regulatory control.
Rick Powers, a business law professor at the University of Toronto’s Rotman School of Management, says the bottom line is Canadians need to make sure the deal lives up to its “merger of equals” promise. “These exchanges live and die through technology,” he says. “Where are future investments going to be made, London or Toronto?” While those details can likely be ironed out as part of Ottawa’s review process, the bigger question remains: can TMX get its biggest and most important users onside before it’s too late?