Thomas Kloet has lived and breathed markets since he went to work as a young accountant at the Chicago Mercantile Exchange in 1980. Today, at 52, he is chief executive officer of TMX Group Inc., the holding company for the Toronto Stock Exchange, its venture exchange, and the Montreal Exchange. The operation is still the dominant equity bourse in the country - although new alternative trading systems, such as the broker-owned Alpha Group, are nipping at its heels. Mr. Kloet gives his take on how TMX can grow in a hypercompetitive environment.
Why did you leave the Singapore Exchange in 2002 before the end of your term?
I had a three-year contract and I left four months before [the end of it] I had achieved everything I wanted to do - I was hired to convert it from a mutual to a for-profit company. We went public on U.S. Thanksgiving Day in 2000; I was interviewed on CNBC and I said, "I'm not bringing a turkey to the market."
Today, the Singapore enterprise we took public as a billion-dollar company has a market capitalization of $9-billion (U.S.)
So what do you hope to achieve at TMX?
Our core franchise is in the equity business. We have a very successful listing and trading franchise. Even in a multimarketplace environment, we have retained 75 per cent of market share.
We bought the derivative business of the Montreal Exchange and are in the process of growing that. We've built NGX [Natural Gas Exchange]from a small company to a decent-sized company which fulfills the need for a physical market in natural gas, crude and electricity
So where does the future growth come from?
My vision is we will continue to diversify the revenue sources in areas away from the core competencies - in things attached to, but not necessarily in, the exchange trading business. We've had some success. In the past five years, our revenues are up 2½ times and the reliance on cash trading is much lower. It went from mid-30s in percentage to 17 to 18 per cent. We've made the pie bigger, but changed its composition.
But aren't people looking for something more dramatic?
That's fair. There are probably 15 projects we are working on where we can drive revenues further. In baseball terms, we're going to hit a bunch of singles and doubles in these businesses. If I think of NGX, it is a single or a double; MX is maybe a triple. We're not going to swing for the fences and try to hit home runs with every at-bat.
That doesn't mean we wouldn't do the big international transaction. But our focus is on continuing to build around our core franchise in the markets we serve.
Is the big opportunity going to be a merger?
Or an acquisition. I'm clearly hired here not to sell the institution, but to build it. It's a question I explored a great deal in the job interview process. I wanted to know what I was coming in for - to build this business or to sell it? And the mandate was to build the business, and that's what I'm trying to do.
The M&A opportunities we would look at would meet a strategic need for Canadian capital markets; be accretive to shareholder value; and represent a better alternative to shareholders than giving the cash back or buying back shares.
But aren't you playing defence against new challengers in alternative trading systems (ATSs)?
For sure. And the regulatory community has mishandled, in every way they could have, the fact that there is going to be competition.
I'm all for competition. I've been a competitor, whether I've traded or brokered or been in sports, but I believe in competition on a level playing field. I question whether the trading of stocks should be allowed to happen in a less-regulated environment just because we call something an ATS, versus an exchange. That concept is flawed and poorly thought through. I don't mind ATSs existing, but I think they should play by the same rules we do.
Don't you just have to live with the regulations you have?
I'm a free-market thinker. I had the privilege to spend much of my board time at the Chicago Mercantile Exchange sitting next to Nobel Prize-winner Merton Miller from University of Chicago. I learned a huge amount about free markets, but true free markets are ones where you compete in the same rules and the same structure. That's where the securities regulators have let the market down.
What people want is to see less talk and more action from you.
Yeah, we focus more on the action. We can only do so much about the regulatory thing. But we want the investing public to understand that there is a different regulatory structure for the ATSs than there is here. When they trust their stock trade to an exchange, they should be asking their broker where it is being sent; or instruct them where to send it. I think the structure makes a difference.
You say TMX offers the premier resource exchange in the world. But is that status unassailable?
I'd never say anything is unassailable, for that implies a certain smugness that I don't want the institution to have. I'm a fighter so I want to make sure I keep my edge, and I want the institution to be that way.
But we're really good at servicing that sector. I'm not talking just about TMX, but the cadre of analysts, investors and investment banks who do their jobs pretty darn well.
Only about 40 per cent of our listed issuers come from the resource sector. We are the first- or second-largest clean-tech exchange in the world; we have significant financial-sector presence, not only from the Canadian banks, but also some non-Canadian financial institutions; and we have 52 companies from China.
Doesn't the loss of mining giants Inco and Falconbridge as listed issuers worry you?
It does, but if we do our job well, given the investment community here, we'll keep those listings as they morph into a different entity.
Look at the Potash-BHP thing. I expect that, had that deal gone through, we would have worked our damnedest to offer BHP a compelling proposition that they should list here. It would have helped their brand, would have helped their Canadianism, and given their employees a place to deal with the stock they got.
Can you grow as an exchange with economic power shifting to the BRIC countries (Brazil, Russia, India and China)
We can, partially because we're Canada. As the BRIC companies seek capital, we would expect the issuers will list in their domestic markets, as well. But those BRIC issuers will need to gain access to international capital. Canada has outstanding stability, the banking system is top-rated, the rule of law is clear. And we adjudicate our responsibility in approving listings real well. So the plumbing is here to offer them access.
Do you actually live in Toronto?
My wife and I live here full-time. We sold our house in Hinsdale, Ill., the Chicago suburb where we lived. We live right downtown in Harbour Square. Chicago and Toronto are similar cities, it's true. But downtown on summer weekends, it seems to be just us and Yankee or Red Sox fans or fans of whoever the Jays are hosting. All the Toronto people are at their cottages. We're not cottage people yet - I'm passionate about golf.