With stock trading volumes plunging, market operator TMX Group Inc. is reaping the benefit of its purchase of a derivatives business. TMX, then known as TSX Group, cut the deal to purchase the Montreal Exchange Inc. at the very end of 2007. TSX had to pay a big price at a time when derivatives markets were very hot, and selling at very large multiples.
In the years that followed, the transaction looked overpriced. However, the long view was always that at some point, derivatives would be the place to be as stock trading became more commoditized. That time may well be here.
When it comes to straight trading fees, TMX now makes more from derivatives than from stocks. In the fourth quarter, trading, clearing and related revenue from derivatives rose 20 per cent to $27.7-million, while the sales from “cash” trading of equities and bond fell 29 per cent to $22.6-million.
It appears the trend is accelerating. Equity volumes have slumped hugely since late last year. A review of the average daily volumes on the TSX in the first dozen trading days of April show that activity is down 13 per cent from March. Volumes are down a stunning 30 per cent from the end of 2010.
But on the derivatives side of the business, activity is surging.
Trading activity soared 22 per cent for derivatives in March, relative to March 2011. April looks even better. Earlier this week TMX said the Montreal Exchange set a record for daily trading of its flagship derivative, the three-month Canadian Bankers' Acceptance Futures (often called “BAX').
To be sure, equities are still central to TMX's success. Fees from listing stock for corporations and sales of stock-trading data are large sources of revenue. In all, the total revenue from equities still dwarfs derivatives.
But the trends are moving in a direction that shows that while the short-term price for Montreal Exchange was steep, the long-term vision was sound.
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