TMX steady-as-she-goes approach paying off despite Nasdaq and Aequitas competition

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One of the few constants these days in Canadian financial markets is TMX Group Ltd.'s top line, and investors can expect more of the same.

For more than four years now, Canada's largest stock market operator has reported quarterly revenue between $165-million and $195-million each and every quarter.

TMX duly obliged again, in the period that ended on Sept. 30, reporting $180.3-million in revenue, up 3 per cent year-over-year.

The owner of the Toronto Stock Exchange also announced late Thursday evening that it is increasing its dividend by 12.5 per cent to 40 cents a share, the first bump in the payout since 2012.

In a conference call with analysts on Friday, TMX's chief executive officer, Lou Eccleston, said that revenue growth in the "mid-single digits," was a reasonable expectation.

TMX's shares rose by 1.5 per cent on Friday.

This is all very steady-as-she-goes stuff, and stands in sharp contrast to a little over a year ago, when investors had a collective freakout.

In December, 2015, Nasdaq Inc. announced it was busting into the Canadian exchanges market, acquiring Chi-X Canada, giving it about a 20-per-cent market share in equity trading. TMX was facing what appeared to be its biggest competitive threat yet, and its shares fell by more than a fifth in the span of about two weeks. Fast forward to the present day and not only has the stock recovered, but it's trading about $15 a share more than it was before Nasdaq joined the fray.

Eleven months on, TMX is a trimmer version of itself but it is not an entirely different beast. In September, the company announced a restructuring that will eventually see it reduce its head count by 115 people and shave roughly $13-million off its costs.

Despite some public musings recently from Mr. Eccleston about maybe making an acquisition, TMX hasn't yet pulled the trigger and observers aren't expecting any big moves from TMX over the short term, apart from continuing cost cutting.

Mr. Eccleston has been CEO now for about two years. Under his watch, TMX has sold some of its non-core assets, such as its communications business Equicom. He also made changes to the executive suite, including bringing in Nicholas Thadaney to replace Kevan Cowan as CEO, global equity capital markets.

So far, Mr. Eccleston's arguably conservative strategy has paid off, despite the ostensibly tougher operating environment.

While Nasdaq Inc. recently launched a dark pool exchange in Canada, it hasn't moved the needle much in the traditional "lit" market, which still accounts for the lion's share of trading.

With Mr. Eccleston as CEO, TMX has also been able to fend off Aequitas Innovations Inc., another deep-pocketed Canadian competitor. In March, 2015, Aequitas launched a pair of alternative trading platforms amid much fanfare. A year and a half later, Aequitas run by exchanges veteran Jos Schmitt and backed by RBC Dominion Securities, among others, has failed to make a meaningful splash. As of the end of the third quarter, Aequitas had just over 6-per-cent market share of trading by value. The big sting is that a huge proportion of that business comes from unlucrative cross-trades.

"If you X out intentional crosses, which are a zero-fee business, its market share is probably still in the range of 1 to 2 per cent, Paul Holden, analyst with CIBC World Market Inc., said in an interview.

"At that type of market share, as far as I can tell, it's almost impossible to make money. I would assume it's a losing proposition now."

TMX's share in trading was just under 55 per cent as of the end of September.

As steady as TMX is sailing, Mr. Holden isn't entirely satisfied.

"I'd like to see more stable sources of revenue growth," he said.

"That's something that's been lacking."