TMX Broadcast Centre manager Kris Backus walks in front of the centre's display board in Toronto on Monday May 16, 2011.Frank Gunn
The fact that the Competition Bureau has concerns with the Maple Group plan to buy TMX Group and create a stock market power in Canada is not going to surprise many who have been watching the transaction, but the breadth of the concerns may.
Going back to the day Maple's plan was announced, it was clear that the group of financial institutions comprising Maple was going to have to convince the Competition Bureau on two fronts that its plan would not restrain competition. It appears that so far Maple has succeeded on neither.
The commissioner has told Maple that she has "serious concerns about the likely competitive effects of the proposed transactions in the current environment, primarily in connection with equities trading and clearing and settlement services in Canada."
Recall that Maple's plan is to combine the Alpha trading system, which is mostly owned by Maple backers, with the TMX. That would create a company with more than 80 per cent market share in trading. Maple also wants to fold CDS, the country's main stock clearing and settlement system, into TMX.
Of late, most of the focus has been on the competitive implications of the latter. Would CDS be able to ramp up pricing for clearing and trading services? They currently are cheap in Canada because CDS, while a monopoly, is a not-for-profit. Barriers to entry are high. Starting a new clearing system is capital and technology intensive.
Even so, those on the street who are concerned about the issue acknowledge that that's relatively easy to solve, with strongly regulated pricing.
The surprise is the news from the Competition Bureau that Maple has not convinced the bureau that the Alpha transaction should get a pass. Maple has pushed hard the notion that even though Alpha and TMX together would have more than 80 per cent market share in trading in Canada, that there are few barriers to entry and little pricing power in the trading market so the transaction would not hurt consumers of trading services.
The Maple view has gotten traction in the market, so much so that most investors following the TMX transaction had largely stopped talking about the Alpha side.
However, there was always a hole in the Maple argument on Alpha, which is that few other competitors in the trading business in Canada have been successful in gaining significant market share. That's because in Canada, you need the support of the banks and their trading flow to create a strong market that's active. That's what made Alpha work. With the banks in Maple now incented to support a combined TMX and Alpha, how would any new system get up and running at any real scale?
Solving the concern of the bureau on Alpha won't be as simple likely as regulated pricing, because unlike CDS, which is a one-player market, the trading side has multiple players and is extremely dynamic. The backers of Maple also can't simply agree to send a certain percentage of trading to other markets to support competition, because that would contravene securities rules that demand that trades be sent wherever they are most likely to get the best price.
The upshot is that Maple will likely have to consider dropping the Alpha transaction altogether. Getting bureau approval for the Alpha-TMX combination has long been a condition of Maple doing the deal, but sticking to that may kill the deal.
If Maple really wants TMX, it's going to have to get creative.