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‘Frustration’ over marijuana-stock policy as TMX Group reports results

TMX Group Inc. is reviewing what to do about cannabis firms with U.S. operations that want to list on its exchanges.

Mark Blinch/Reuters

Canada's largest stock-exchange operator is slated to report its latest financial results on Wednesday amid growing concern over how it is handling the listing and trading of some marijuana companies.

TMX Group Ltd. is reviewing what to do about cannabis firms with U.S. operations that want to list on its exchanges. TMX is said to be concerned about legal liability it could face by facilitating transactions in shares of these companies because of a lack of clarity around U.S. pot laws. The drug has been legalized in some form in many states but remains illegal under federal law.

The exchange has said little publicly about its deliberations. In the meantime, uncertainty clouds the market for marijuana shares – to the irritation of some players in the pot industry and those who would finance them.

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"The lack of a clear policy [from TMX] has caused frustration across various participants, from U.S. operators to investors, as well as Canadian licensed producers, which either have made investments in the U.S. or are considering doing so," Vahan Ajamian, an analyst at Beacon Securities Ltd., said in an interview.

"Timing is uncertain and the actual decision is uncertain."

TMX Group is set to release its earnings for the second quarter on Wednesday after markets close. Mr. Ajamian doesn't expect its review of its cannabis policy to be resolved in time for the company's investor conference call, which will be held on Thursday at 8 a.m. ET.

"I doubt we would get a definitive response to this issue on a call," Mr. Ajamian said.

"I don't know what the forum would be for them to actually release something, but I don't think it would be an earnings call for TMX Group."

Shares of TMX have decreased 16 per cent since the Toronto-based company reported first-quarter results in May. The stock rose less than 1 per cent on Tuesday to $66.03.

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The company saw a slowdown in equity financing and trading during the three months ended June 30, according to data released each month by TMX.

An increase in initial public offerings and several big stock sales in the second quarter weren't enough to boost the total new financings on TMX's equity markets. And that will weigh on TMX's revenue from capital formation, Scotia Capital Inc. analyst Phil Hardie predicted last month in a research report.

There were 154 financings on the Toronto Stock Exchange during the quarter, a 20-per-cent drop from a year earlier, according to the Scotia report. Companies raised a total of $16-billion, 13 per cent less than what was raised a year earlier.

On the TSX Venture Exchange, meanwhile, new equity financings increased 24 per cent, with companies raising a total of $1.9-billion. But the number of transactions on the junior market tumbled 17 per cent to 415 from 499 a year earlier.

"We remind investors that TMX generates stronger listing fees on a higher number of small deals than on a comparable level of financing driven by a lower number of very large issues," Mr. Hardie said in the note. "A shift back toward smaller deal size could provide an unexpected lift in listing fees."

Trading volumes on the TSX declined 17 per cent in the second quarter from a year earlier. Activity on the TSXV, which handled less than half the number of shares than the TSX did, fell 14 per cent from a year earlier.

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TMX's equity markets were even quieter in July, which is the start of the company's third quarter. Last month, trading volumes across its marketplaces plunged 25 per cent.

Mr. Hardie expects volume on the Montreal Exchange, which is where derivatives are traded in Canada, to be "a bright spot" for the company. The MX already reported higher monthly trading volumes during the second quarter compared to the same period in 2016.

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About the Author
Capital Markets Reporter

Christina Pellegrini is a reporter at The Globe and Mail and a regular contributor to Streetwise, covering capital markets, the exchange business and market structure.She writes about the capital markets divisions of BMO, CIBC and National Bank; independent brokerages such as Canaccord Genuity; and the Canadian operations of foreign dealers including JP Morgan, Goldman Sachs, Credit Suisse and Citigroup. More


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