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TMX Group Ltd. saw a significant drop in trading revenue and listing fees last year, with activity across the company’s stock exchanges falling amid a general slowdown in public markets.

The volume of securities traded on the Toronto Stock Exchange, TSX Venture Exchange and Alpha exchange fell by 25 per cent to 30.2 billion securities in the fourth quarter of 2019 from 40.2 billion in the same period in 2018. For the year as a whole, equity and fixed income trading revenue was down 10 per cent compared with 2018.

As the fulcrum of Canadian capital markets, TMX is vulnerable to the impact of broader market trends. There has been an increase in companies choosing to stay private. And despite a bull run in stock prices in 2019, companies are doing fewer financings and transactions.

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"Market conditions for 2019 presented a significant challenge for the financial services industry and the exchange sector. Uncertainty fuelled by macro economic and geopolitical factors led to a global slowdown in capital markets activity,” interim chief executive John McKenzie said on a Tuesday morning call with analysts. Mr. McKenzie took over as CEO last month after Lou Eccleston stepped down.

Activity by listed companies was also down, with the number of financing transactions on the TSX falling 11 per cent year over year. Initial listing fees fell by $2.4-million last year, or 18 per cent, while additional listing fees, which TMX earns when listed companies raise additional money, dropped by $11.9-million, or 14 per cent.

“It’s an usual environment. Typically when you have equity markets going to new highs, as we’re seeing both in Canada and the U.S., with a generally pretty good macro backdrop, you tend to get a lot of financing activity, but we’re not," Paul Holden, a CIBC Capital Markets analyst, said in an interview.

“There’s not a lot of corporate confidence necessarily in the forward outlook, so you’ve seen capital investment a little bit lighter than what we typically expect at this point in the cycle,” Mr. Holden said.

The drop in capital formation and equity and fixed-income trading was partly offset by strong results from Trayport, the London-based wholesale energy trading platform that TMX acquired in 2017. The company’s two derivatives units, the Montréal Exchange and Canadian Derivatives Clearing Corporation, also performed well, despite a year of low volatility.

"Their derivatives business has generally been trending well; extended market hours has had a positive impact, the launch of new products has definitely had a positive impact, so they’re doing the right things,” Mr. Holden said.

Over all, TMX saw 2019 revenue drop 2 per cent to $807-million from $821-million in the prior year. Net income fell to $248-million from $286-million, for earnings a share of $4.42, down from $5.14 in 2018. The principal contributor to the drop in net income was an $18-million writedown for Shorcan, a TMX subsidiary that offers inter-dealer bond brokerage services.

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“We didn’t see the long-term growth in that business that would support the valuation that we were carrying on the balance sheet,” Mr. McKenzie said of the Shorcan writedown.

When you strip out the Shorcan writedown, the company’s earnings remained relatively flat, despite the lower revenue. This was achieved in part by a $12-million reduction in employee benefits and compensation, which included a $6.8-million cut in the short-term employee performance incentive plan.

“Bigger picture, the capital-raising environment remains lacklustre, although expense containment remains impressive. The focus now shifts to the results of the CEO search,” RBC Dominion Securities analyst Geoffrey Kwan wrote in a note on Tuesday.

TMX’s stock price dropped 2.9 per cent on Tuesday, closing at $120.88

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