Skip to main content
streetwise

A worker shelters from the rain as he passes the London Stock Exchange.TOBY MELVILLE

Watching some of the country's biggest financial institutions line up to oppose the TMX Group Inc.'s plan to combine with London Stock Exchange Group Inc., the understandable question comes up, how much of this has to do with sincere concern about the fate of the country's capital markets and how much is self-interest?

That question is particularly acute given that the four banks that appear to be leading the push against TMX are all shareholders of Alpha Group, the competitor to TMX's Toronto Stock Exchange that has shaken up the trading world. (Those banks are Toronto-Dominion Bank, National Bank of Canada, Canadian Imperial Bank of Commerce and Bank of Nova Scotia -- though Scotia seemed to be potentially still debating its support as of Tuesday night.) Are the banks trying some sort of push to isolate TMX in the global consolidation game, cutting it off so it will wither, leaving the field open for Alpha in stock trading?

It's an interesting conspiracy theory. Let's break it down.

For starters, while TD has been an active supporter of Alpha, CIBC has not. In fact, since Richard Nesbitt, the former head of TMX, took over as head of CIBC's securities operations, by all accounts CIBC has taken little interest in Alpha other than routing a lot of trading there. (Which, ironically, has led to CIBC being Alpha's largest shareholder as the ownership group is structured so that those who trade the most on Alpha earn extra shares in the company.) National and Scotia have also been more or less just along for the ride on Alpha, as opposed to vigorous supporters.

The big push behind Alpha has come from TD, but also from Royal Bank of Canada. And RBC is on the record supporting the TMX merger, with CEO Gord Nixon worrying that if the deal doesn't go through TMX will indeed wither. Another Alpha owner, Canaccord Financial, was asked to sign on to the opposition to the TMX deal but is said to have said no thanks. And a third, Bank of Montreal, is advising TMX and has made no public statement on the merger, but given its decision to work for TMX, it's not hard to guess where BMO stands.

So three owners of Alpha are for the deal, or at least keeping quiet, while four are against it. Hardly evidence of a concerted move to support Alpha at TMX's expense.

Now, following the web further, maybe Mr. Nixon is just supporting the LSE-TMX merger publicly because RBC is an adviser and will get paid if the deal gets done. But it's hard to believe that Mr. Nixon would act against what he believes are the best interests of Canada's capital markets, which after all are still the basis for much of RBC's earnings, to earn a fee on the deal. That's even more true given that RBC's fee is not going to be all that big, because sources say RBC is a junior partner in the three-bank advisory trio for LSE, and likely isn't in line for a big cut of the paycheque.

Look at it another way, by following the money. How much would each bank stand to gain if indeed Alpha were to supplant TMX as the main trading venue in Canada for stocks?

For the moment, stock trading is not a vastly profitable game. Alpha, TMX and other players have been on a race to the bottom for pricing.

So the real potential gain for Alpha's ownership group would have to be on their investments in the company.

Let's look at some ballpark numbers.

TMX is worth about $3-billion most days in market capitalization. But not all of that value comes from its stock trading businesses, given that it's also big in areas like derivatives and energy trading. Ascribe two-thirds of that to stocks, and you get to $2-billion.

Now assume that Alpha can take away half that value by stealing half the market in stocks (it's currently closer to 30 per cent) and in data sales and listings (where it's not even close to half). That could conceivably mean Alpha would be worth $1-billion, and that's assuming the markets don't bash the valuations of both because of the fierce competition that would be erupting on all levels. But that's a big assumption, so knock another 20 per cent of the valuation for margin and multiple contraction. That leaves $800-million as a (very) rough potential valuation for Alpha if it can steal half the stocks business in Canada.

That's a nice valuation, but split amongst Alpha's nine-partner ownership group it averages less than $100-million apiece. Some banks, like CIBC, would be closer to $200-million, while others would be in the $50-million range.

That's not chump change, but for a bank like TD or Scotia that can earn $1-billion in a quarter, it's also not going to move the needle far.

That leaves fees -- perhaps the banks that are against the deal want to keep TMX alone and weak so that Alpha can continue to beat TMX up on fees and keep costs down for big trading banks like CIBC. That's probably the most compelling argument for an Alpha conspiracy. But again, the biggest beneficiary there would be CIBC, the biggest trader in the country, and while CIBC is a part of the anti-merger push it's not a big Alpha supporter. (And CIBC has said that it would accept the merger with controls in place to protect Canada.).

There's no doubt that on some level, Alpha may be factoring into the calculations, but the web of conflicting behaviour suggests that Alpha is not the driving factor behind whether banks support or oppose the TMX-LSE deal.

The last argument is the old small-town one, that the banks would like to remain the big fish in a small pond. It may be that the banks are being parochial, and want to keep control of the TMX within walking distance of their own head offices. This one probably has the most weight.

Report an editorial error

Report a technical issue

Editorial code of conduct

Tickers mentioned in this story

Study and track financial data on any traded entity: click to open the full quote page. Data updated as of 28/03/24 4:00pm EDT.

SymbolName% changeLast
BMO-N
Bank of Montreal
+1.35%97.68
BMO-T
Bank of Montreal
+1.13%132.25
BNS-N
Bank of Nova Scotia
+1.21%51.78
BNS-T
Bank of Nova Scotia
+0.94%70.07
CM-N
Canadian Imperial Bank of Commerce
+1.3%50.72
CM-T
Canadian Imperial Bank of Commerce
+1.13%68.67
NA-T
National Bank of Canada
-0.45%114.06
RY-N
Royal Bank of Canada
+0.48%100.88
RY-T
Royal Bank of Canada
+0.29%136.62
X-T
TMX Group Ltd
-1.98%35.73

Interact with The Globe