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The Globe and Mail

Nasdaq makes its push for a stock exchange in Canada

Nasdaq Inc. is pushing ahead with its bid to operate a stock exchange in Canada, though it won't be vying for new listings of public companies right out of the gate.

The U.S. financial company – best known for the stock market that lists major technology firms such as Apple Inc. and Microsoft Corp. – currently operates a small trading business in Canada, through which investors can swap can more than 4,100 securities listed on the Toronto Stock Exchange (TSX) or TSX Venture Exchange (TSXV).

Its proposed exchange will still offer trading in these securities, as well as in stocks that are listed on the fledgling Canadian Securities Exchange (CSE), according to a copy of its application obtained by The Globe and Mail. But if its application to become an exchange is successful, Nasdaq's Canadian arm would be able to expand its business beyond trading.

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Stock exchanges can establish market-making programs to enhance trading liquidity, as well as operate a listings service to public companies and exchange-traded funds, which generate initial and yearly fees. Listings are a major source of business for TSX parent TMX Group Ltd.; last year, 25 per cent of its revenue came from its capital formation group, which runs the listings operation.

The details of Nasdaq's application are set to become public on Thursday, months after the global exchange behemoth filed its application with the Ontario Securities Commission last December.

Should its application be approved, Nasdaq is also separately seeking to implement a formal market-making program to spur more trading activity on its venues and bolster the quality of execution, following a path blazed by other Canadian exchanges that have recently introduced similar liquidity systems.

"The reason we're doing an exchange at this point is for us to level the playing field with our competitors," said Dan Kessous, head of Nasdaq's Canadian equities business. "This will be the foundation for adding other functions like listings."

Nasdaq's latest expansion into the Canadian market began when it acquired trading venue Chi-X Canada in February, 2016. It's being closely watched on Bay Street because the company has the deep pockets, reputation, track record and close ties to many Canadian brokers and issuers to compete against TMX Group, the country's largest exchange operator.

The process of becoming an exchange can be lengthy. Any novel features are often hotly contested because even the smallest tweaks to how the market is structured can be beneficial or harmful to brokers and their clients. Developing a framework for listings is another lengthy process and Nasdaq is still discussing a plan internally on how and when it could enter this business, Mr. Kessous added.

"We're looking at when, how and what kind of listings we want to have on our venues if we decide to go with listings," he said. "We're not at the stage yet where we've decided what kind of companies we want to list and what the listings strategy will be."

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In Canada, the majority of both corporate issuers and increasingly popular exchange-traded funds are listed on either the TSX or TSXV. Toronto-based TMX Group has also cornered the market for derivatives with its Montreal Exchange unit. Nasdaq is considering how it could take a bite out of both the equities and derivatives businesses.

"We are going to look to expand across asset classes," said Tal Cohen, senior vice-president of North American equities at Nasdaq.

"We have clients knocking on our door around derivatives and opening up in options trading. And we have issuers knocking on our door on the structured-product front and some on the corporate front, saying let's talk."

Other exchanges have tried to both attract new corporate listings and poach corporate listings from TMX. The CSE has been the most successful, amassing a roster of 326 listed securities. Competing against TMX has been an uphill battle, in part because of an agreement TMX has in place with S&P, which oversees the S&P/TSX composite index among other major indexes, that only stocks listed on the TSX can be included in an S&P/TSX index.

Since the Chi-X deal, Nasdaq has been tight-lipped about its plans for Canada. And that hasn't changed. It declined to give specifics on how becoming an exchange might boost its market share in trading. It won't say when it could open a listings franchise, or if it would look to target mid- or large-cap issuers or ETFs, or all three.

"There's a balancing act because TMX is paying close attention to us and every time they think we are making a move, they try to react or step in front of that," Mr. Cohen said. "We're just cautious."

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In the last year and a half, Nasdaq has been busy in Canada migrating its technology from Chi-X's platform to Nasdaq's. It's also relocated to a new data centre in Toronto and moved its disaster-recovery facility to Chicago.

It launched its third market last year and filed its equities exchange application with regulators in December.

The 11 employees who run Nasdaq's three venues in Canada have executed these changes with little disruption to clients and while preserving its market share in trading, says Mr. Kessous.

"We have a strong brand and we want to be careful how we use it," he added.

"We don't want to rush it. And we want to make sure that when we do it [listings], we do it the right way."

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