From the moment Nasdaq Inc. cemented its arrival into Canada last December with the $US110-million purchase of Chi-X Canada and its 22% share of the order flow of S&P/TSX Composite securities, expectations of a shake-up in the country’s trading and listing scene have been running high.
“The entry of a new competitor with the brand of Nasdaq cannot be easily dismissed,” says Paul Holden, an analyst with CIBC World Markets Inc., who covers rival TMX Group Ltd. (TSX:X).
Expectations only intensified once the deal closed in February and Nasdaq then went on a US$1.4-billion cross-border buying spree. First, it acquired Canadian-based news distributor Marketwired for US$108 million. Then in March, it paid US$200 million to purchase Boardvantage, an online portal and communication service provider for corporate boards. It topped things off with a US$$1.1 billion deal for the International Securities Exchange (ISE), which operates three options exchanges, giving Nasdaq more than 40% of the U.S. options market.
Word of the first actual new market foray into Canada came next, when Nasdaq left it to the Ontario Securities Commission to announce the company’s proposal for a standalone dark pool, to launch in September. Dark pools, through which buyers and sellers trade anonymously, account for less than 6% of overall trading. The top player in that market is Match Now, owned by ITG Canada Corp.
The deadline for comments on Nasdaq’s proposal is the end of May. If it goes ahead, Nasdaq will house the dark pool under the Chi-X umbrella. Earlier, it rebranded Chi-X’s two existing lit pools as CX and CX2, and it says it intends to call the dark pool CXD.
How does this move fit into a bigger offensive? The company declined Listed’s request for an interview, saying it wasn’t “ready to discuss plans.” But observers say beyond this start, the opportunity for Nasdaq, which breaks its overall business into five categories—listings, market services, data services, corporate solutions and market technology—lies in derivatives, listings and possibly data.
CIBC’s Holden says “my assumption is that they are not coming into Canada for the cash equities trading business, there’s not a lot of money there.”
The “two obvious levers and opportunities,” he says, are listings and derivatives. However, “I don’t think it will be easy for Nasdaq to wrestle away listings from the TMX. There are certain advantages that will always go to the incumbent and dominant exchange.” For example, to be included in a popular S&P TSX index, a stock must be listed on a TMX-owned exchange.
Even beyond that, Nasdaq faces additional hurdles, notes Andreas Park, a University of Toronto financial economics professor who follows the capital markets. “Chi-X would have to change. With listings, you need a legal department and some form of regulatory obligations to maintain listings. It’s not something you could do on the side or one moment to the next. It requires hiring people and building up a department.”
“The structure the TSX has with the Venture exchange, where you take a company to the Venture and it graduates to the main exchange, is very difficult to copy and very difficult for anybody to fight against.”
However, Park says, there might be opportunity in cross-listings, where 181 Canadian companies already trade on U.S. exchanges. “If Nasdaq Canada provides access to American markets in a simplified way, it could be attractive. Generally, it’s good for companies to access a bigger capital market.”
Jos Schmitt, who runs the new Aequitas Neo Exchange and trading system—which landed its first listing (an ETF) in March—says getting new listings in Canada is an uphill climb. “It was a tougher nut to crack than we originally anticipated,” he says. “Putting a listing on a new stock market is a big leap of faith.”
Nevertheless, Schmitt thinks there is opportunity for Nasdaq, saying that in 20 years “we have not seen any true competition with respect to senior listings. That is not a good environment for capital raising.” So he welcomes Nasdaq’s arrival. “Let’s have someone else join us in the fray of bringing strong competition to the market and help us work together in addressing some of the monopolies that are still there.”
Tom Caldwell, chairman of the Canadian Securities Exchange, which also provides securities listings, says “it’s hard to say” what impact Nasdaq will have. “I don’t know its value proposition. What is it going to add?” he asks.
Caldwell says it’s noteworthy that former TMX CEO Tom Kloet is on the Nasdaq board. “He’s probably involved in this [move into Canada] and has a view in mind where they can do some business.”
No one expects the TMX to roll over anytime soon. While its share price got thrashed when the Chi-X Canada deal was announced, plummeting to $33.88 from $46 shortly after, it had since bounced back to top $50 in late April.
CIBC’s Holden says the TMX learned its lesson when Aequitas’s Schmitt originally formed Alpha Trading Systems in 2007 to compete with the TMX (Alpha was later absorbed by the TMX when the big banks took it over in 2012). “You can’t simply dismiss competition,” says Holden. “I think there will be some kind of reaction or at least being more prepared like they did with Aequitas. They did take some competitive responses. They didn’t sit idly by with Aequitas.”