The Bay Street firms that weren’t invited into the Maple Group plan to buy TMX Group Inc. are lining up their options to ensure that competition and low-priced trading services remain, should the deal to create a market-dominating company go through.
For those outside the 13 banks, brokerages and investment firms that make up Maple, there is a concern that the consortium’s bid to buy TMX would drive up costs for other users of the stock market.
The Maple plan would combine the two biggest players in the country in trading, and create a for-profit system to replace the current not-for-profit clearing system for shuttling cash between buyers and sellers of stocks after trades take place.
On both counts, the potential issue is costs. Given that for brokerages, trading is a low-margin business, any added expenses eat into profits fast unless they are passed on to customers – better known as investors big and small. So firms are looking for contingency plans in case the fears about costs come true.
That’s why sources said some brokerages are already mulling the idea of starting a new trading system to compete in the business of matching stock buy-and-sell orders, and pushing regulators to adopt a strict cost control system for the clearing business based on the utility industry.
The fears about competition and costs have hung over the Maple plan since it was unveiled in May as a hostile bid for TMX.
Now, with fewer barriers standing in the way, brokerages that aren’t involved in the consortium have to seriously start planning for a world where Maple gets TMX.
There is no rival to the Maple offer since London Stock Exchange Group PLC dropped out of the running earlier this summer, when TMX shareholders declared the LSE-TMX merger plan inadequate. While the Maple offer remains hostile, TMX and Maple are talking as Maple seeks a friendly deal.
There are still skeptics who don’t think that a deal is possible, largely because of a belief that the federal Competition Bureau won’t let it go ahead. That’s reflected in a wide spread between TMX’s trading price – $39.94 as of the Monday close – and the $50 value that Maple has put on its bid.
TMX itself has pushed back against the Maple idea for more reasons than simply the competition situation – but it has highlighted more than once that a deal without a credible plan to address the potential competition hiccups is not viable.
In trading, Maple wants to combine TMX with the Alpha trading system that is majority-owned by some Maple members. That would create a business with a market share of greater than 80 per cent.
In response, there’s a contingency plan from some large brokers that do business in Canada to create a sequel to Alpha, given that new trading systems are relatively simple to start with off-the-shelf technology. The irony is that doing so would support Maple’s argument that combining Alpha and TMX wouldn’t give market power because the barriers to entry are so low that new entrants would pop up in short order.
When it comes to clearing, where Maple wants to gain control of the CDS Inc. clearing system, the model the non-Maple brokers are pushing is that of a regulated utility.
Maple has said that it won’t raise prices for existing clearing services, and points to the experience at the TMX-owned and for-profit clearing business that is focused on derivatives, where there have been no vocal complaints about costs.
Still, just in case, rival brokerages are touting the idea that CDS fees should be strictly regulated on a cost-recovery plus set margin basis. In other words, if CDS invests a dollar, it should get a set return on that dollar – an idea lifted straight from the world of regulated utilities. Some non-Maple firms are pushing that model in conversations with the competition regulator, which is busy canvassing market users for opinion, sources said.
Peter Block, a spokesman for the Maple consortium, said the group is constantly talking to the competition regulator to address any issues. However, he declined to discuss specific commitments.
Both Mr. Block and TMX spokeswoman Carolyn Quick declined to comment on the state of the negotiations between the two companies.