Maybe it’s the wine talking. John McKenzie clearly has something on his mind. Yet each time he edges closer to sharing it, he pulls back. “I’m not sure if I want to use these words, whether they should come out of my mouth or not.”
We’re at Grape Witches, a specialty wine shop and venue on Toronto’s fashionable Dundas St. West, imbibing a sampling of organic and biodynamic wines from around the world. Moments earlier, McKenzie had made a surprising admission. “I’m not very Bay Street,” uttered the man who oversees the plumbing upon which vast swaths of Canada’s capital markets operate. McKenzie is the CEO of TMX Group, which owns the Toronto Stock Exchange, the Venture Exchange, the Montreal derivatives exchange, and the clearing houses that process millions of equity and derivatives trades each day, among other assets.
The venue is the TMX’s choosing. Around the company, McKenzie is known for his fondness for unique and hard-to-find wines. During the lockdown, he sent three bottles to everyone on his leadership team for a virtual wine tasting, and over the summer he and his wife, Rebecca, toured wineries in two regions of Italy for his 50th birthday, including a stay at a winery in Tuscany he settled on by pointing to the label on one of the bottles he owned. “Behind these bottles of wine is a unique family business that’s got its own story to tell,” says McKenzie, who considers himself “a consumer, not a collector,” though it’s a distinction only someone whose pandemic project was to build a wine rack under the stairs for his hundred or so bottles might make.
All of which is to say the wine tasting wasn’t a ploy to get the mild-mannered McKenzie to open up. But when pressed to reconcile his claim of not being “very Bay Street” with his status as Bay Street’s chief plumber, his hesitancy gives way.
It’s not just that McKenzie has never lived in Toronto—he grew up and lives in Burlington, a bedroom community to the west, and takes satisfaction in playing softball three nights a week with people “who have no idea what I do every day.” The distinction runs much deeper. “There’s a legacy Bay Street culture that came out of the old brokerage and bond market culture,” he says. “It’s eat what you kill, all for yourself, and very self-driven as opposed to collective-driven, and not the culture we’re trying to create at TMX.” The culture he’s trying to create.
Like those wine bottles, TMX Group has a story McKenzie is eager to tell. It goes something like this: While the company’s vintage dates back 170 years to the original “association of brokers” that formed the Toronto exchange, the current iteration of TMX Group as a publicly traded company emerged 10 years ago this fall, when a group of flag-waving Canadian banks, brokerages, pension funds and insurers operating as Maple Group won control of the business after fending off a merger between TMX and the United Kingdom’s London Stock Exchange Group (LSE).
The protectionist counteroffensive left TMX with a hodge-podge of businesses and still heavily dependent on making money from the fees it got for listing company shares and equity trading. Under former CEO Lou Eccleston, an American import hired in 2014, TMX embarked on an ambitious plan to streamline its operations, and charted a new growth strategy focused on building a data and analytics business, providing more services to listed companies and expanding its global reach. Under Eccleston’s watch, the company made its most transformative acquisition in years when it bought London-based Trayport, an energy trading software firm, for $930 million in 2017.
Today, TMX’s $1 billion in annual revenue is far more diverse, with equities trading accounting for less than one-quarter (down from 42% in 2012) and its data and analytics business—with its more steady, recurring revenue stream—making up 35%. Trayport alone grew sales by 10% last year. When one part of the business faces problems (like, say, a global panic around war and inflation that dries up new listings), the company has other legs to stand on.
But the Eccleston era also became marred by mistrust, resentment and what some employees described as a toxic work environment. His early retirement in January 2020 paved the way for McKenzie, the company’s chief financial officer and a TMX veteran, to eventually take control.
Today McKenzie has reinvigorated the company’s culture—employee engagement levels have jumped from a lowly 50% in 2018 to 74% last year and rising—while pushing ahead with his predecessor’s plan to make TMX a bigger player on the world stage and draw more of its sales from recurring revenue streams in the data analytics space.
Yet he has also envisioned a larger purpose for TMX Group, positioning it as a champion for public capital markets and an advocate for a long-term economic growth agenda from Ottawa. “This is not to critique Americans, but our previous two CEOs were both Americans who were less interested in this company being an engine of the Canadian economy,” says McKenzie.
It’s lofty stuff, and the company has already won accolades from First Nations business groups for its efforts to close the financing gap faced by Indigenous entrepreneurs and scored some early victories in reducing the regulatory burden on public companies.
Still, this is the stock market we’re talking about, and some investors in TMX (ticker symbol: X) are starting to show signs of impatience. For the past two years, analysts and shareholders have peppered McKenzie with a recurring question: When will he do another big acquisition in the data analytics space? And while McKenzie is adamant he won’t be pushed into a deal unless it makes sense, the question isn’t going away.
So while McKenzie sets out to make Canada’s capital markets great again, many eyes are on when he’ll make TMX Group a big acquirer again.
On Feb. 27, 2020, as global markets tumbled on fears about the mysterious new coronavirus sweeping the world, McKenzie was in Miami for a day of investor meetings. Early in the afternoon, his phone rang: The Toronto Stock Exchange’s trading system had failed. Panicked clients were unable to enter or modify orders even as other major markets experienced their biggest one-day declines ever. As the company’s crisis management team swung into action and McKenzie rushed back to Toronto, the decision was made to shut it all down. One by one, TMX hit the off switch on each of its markets: TSX Alpha at 1:51 p.m., TSX and TSX Venture at 1:54 and the Montreal Exchange at 1:59.
Shortly after, McKenzie’s phone rang again. It was then-finance minister Bill Morneau, demanding to know whether the market would reopen on time the next day. “That date, Feb. 27, is tattooed on me,” says McKenzie.
At that point, McKenzie had been on the job as interim CEO for just five weeks. It had already been a tumultuous period for him, both privately and professionally. Nearly a year earlier, his 16-year-old son Jacob was diagnosed with osteosarcoma, a type of bone cancer, which required chemotherapy and surgery at McMaster University Hospital in Hamilton and Toronto’s SickKids over the following eight months. It meant long stretches for McKenzie and his wife at their son’s hospital bedside, and he credits Eccleston with giving him the flexibility he needed to take care of his family.
For McKenzie, his work as CFO became “a safe distraction” from the stress in his personal life—a strategy he would later deploy company-wide during the pandemic. But by the end of 2019, TMX was providing its own set of troubles. In late November, U.S. news site Business Insider published an investigation of billionaire Michael Bloomberg’s financial data firm Bloomberg LP, where Eccleston worked in the 1990s. Citing court records, it raised allegations of sexual harassment against Eccleston related to his time at Bloomberg. An internal investigation launched by TMX’s board of directors found “no evidence that Mr. Eccleston engaged in sexual harassment or sexual misconduct,” but as The Globe and Mail reported, nearly two dozen employees had complained that Eccleston bullied, belittled and embarrassed them.
Jacob had just wrapped up the bulk of his surgeries when McKenzie received a phone call from TMX board chair Chuck Winograd informing him of Eccleston’s pending early retirement and asking if he’d step in as interim CEO. McKenzie, who started at the TSX the month after it demutualized and became a for-profit company in 2000, eventually got the top job after an eight-month review of internal and external candidates
And with that, McKenzie was thrust into crisis as the apologetic public face of the company’s trading-systems failure that February, which the company blamed on a 225% single-day surge in orders compared to the average of the previous few months. In the year that followed, McKenzie says the company invested “eight figures” to boost its trading-system capacity and resilience.
What money couldn’t easily fix, however, was the culture of mistrust he says had taken root at TMX. So, with the pandemic raging and lockdowns upending people’s lives, he embraced the lesson he’d learned during his son’s illness to “make work the thing people don’t have to worry about in their lives.” That meant shifting to remote work, adopting regular communications with staff and providing stipends so employees could upgrade their home offices. His first executive hire was Cindy Bush as head of human resources, whom he poached from movie theatre chain Cineplex. “People can smell a faker, and John is very authentic, so when he says something, people know he means it and he’s going to do it,” says Bush, who notes the words “visible” and “accessible” appeared 12 times in the description for her position.
That approach comes across in other ways, too. For our first interview, McKenzie asked to meet in a boardroom at the company’s headquarters in Toronto instead of his own office—his predecessor’s office—which he dislikes because it’s isolated from other employees. Once he gets the budget approval to tear it down, he wants it replaced with a glass-walled space featuring a round table to facilitate an equal exchange of ideas.
As for that wine tasting, McKenzie wasn’t finished when he revealed his discomfort with Bay Street’s legacy attitudes. After another brief hesitation, he went further. “This language is, well, I’ll use it anyway—the unwritten rule we’ve built into our senior hiring strategy is a ‘no-asshole policy,’” he says. “I don’t want great talent if it’s going to be disruptive to other people.”
If that was code for no more Eccleston types, it’s also accepted that most of the changes the former CEO enacted in terms of strategy and structure remain central to current growth plans. “This wasn’t a matter of John having to come in and completely do away with everything,” says Luc Fortin, CEO of the company’s Montreal derivatives exchange and head of global trading at TMX. “The core was solid, so how do you take what you have and amplify it? And that’s exactly what we’ve done.”
It’s a viewpoint shared by analysts. “Eccleston reorganized the company from having a lot of tentacles in different places, and that let them focus on key growth areas,” says Jaeme Gloyn, an analyst with National Bank Financial. “They had a good strategy in place, so why overhaul it?”
The company has pushed to make its business more global, with an ultimate target of generating more than half its revenue internationally, compared to around 30% today. It had already expanded the trading hours of its Montreal derivatives exchange to include Europe. Last year, it extended that to encompass traders in Asia, too. Now the exchange operates 20.5 hours a day.
TMX has also doubled down on international outreach for the TSX Venture Exchange, its platform for small companies that don’t qualify for a TSX listing to raise public capital. While born out of the ignominious roots of the Vancouver Stock Exchange, a plaything for mining-company shills that Forbes once famously dubbed the “scam capital of the world,” today’s Venture exchange is deeply integrated into the TMX’s ecosystem: Over the past decade, roughly 700 companies have graduated from Venture to the TSX, and roughly one-fifth of the companies on the S&P/TSX Composite Index started life on Venture.
Between the TSX and Venture exchanges, the company has built a pipeline of 1,600 companies that might go public at some point, with half of those outside of Canada. “We’ve put people on the ground around the world, in Chicago, California, Dallas, Brazil, Israel and the U.K., and those people are selling Venture around the world,” says Loui Anastasopoulos, CEO of the TSX and head of capital formation, adding TMX was among the top three exchanges in the world for international new listings last year.
TMX executives even talk cryptically about expanding the company’s equity presence into the U.S., though they’re shy on details. “The Canadian banks have made significant investments south of the border, and we have a right to accompany them,” says Fortin. “Why wouldn’t we go into the U.S. in a bigger fashion?” Could that mean operating an equity exchange in the U.S.? “We’re open-minded,” says McKenzie, though anything the company does there has to be complementary, not competitive, to what the TMX has built in Canada.
While TMX looks outward for growth, it’s facing increased competitive pressures on its home turf. Last November, Cboe Global Markets acquired NEO Exchange, an upstart rival launched in 2015. It was Cboe’s second acquisition in Canada in under two years, after the company acquired Toronto-based MATCHNow and its dark-pool trading platform in August 2020. With a market capitalization of $16.5 billion, Cboe is more than twice the size of TMX Group ($7.3 billion), seemingly making it a potent threat to the Canadian company’s domestic exchange and trading operations.
If McKenzie and other TMX execs are worried, they don’t show it. McKenzie points to the extreme but short-lived negative reaction investors had to Nasdaq Inc.’s purchase of Chi-X Canada, an alternative trading platform, in early 2016. Over the span of a week, TMX shares shed one-quarter of their value on fears the U.S. exchange giant would crush its Canadian rival, but TMX made back those losses within three months. Since then, Nasdaq has been relatively quiet on the Canadian front. “Just because you’re from the U.S. and you hang your shingle here, that doesn’t win you any business,” says McKenzie.
Besides, he adds, having a well-funded global player like Cboe in the picture means “the listing standards of NEO will be brought up to the level we would expect.” In the stock ex-change world, those are fighting words. So, too, is McKenzie’s assertion that Cboe and NEO received an unfair advantage from regulators because certain legacy rules around board structures that apply to TMX don’t apply to Cboe.
NEO CEO Jos Schmitt scoffs at both assertions. “It’s a recurring theme from TMX,” he says. “What they’re ignoring is they have extreme control over the Canadian market, and the market-power abuse we see from their side is much more impactful than any constraints imposed on them.” He points to both the TMX’s control of the Canadian Derivatives Clearing Corp., the main clearinghouse for equity-traded derivatives, and the lock the TSX has on the country’s premier benchmark index, the S&P/TSX Composite. While neither are likely to change, Schmitt says NEO now has several products coming to market that “really leverage the global capabilities of Cboe outside of Canada” that will help it take on TMX.
It’s no secret that being a public company these days isn’t what it used to be. There’s the market obsession with short-term results that CEOs love to gripe about. But selling shares to the public also entails an ever-expanding gauntlet of regulatory filings, a shifting target for environmental, social and governance (ESG) disclosures, and at times hostile treatment from politicians that privately owned companies seem to avoid.
So, it’s no wonder exchanges around the world have seen the number of public companies dwindle over the past two decades, especially as an abundance of private equity and venture capital funding provides an alternative to the IPO route. While TMX executives eagerly point out its exchanges have bucked that trend over the past five years, this is due to new Venture listings. The main TSX board has seen listed companies fall from 1,287 in 2012 to 872 earlier this year.
Which goes a long way to explaining McKenzie’s increasingly assertive stance as an advocate for public companies under the rallying cry, “We make markets better and empower bold ideas.”
TMX held its first-ever Hill day last fall in Ottawa, and McKenzie and David Clarke, the company’s first head of government affairs, are set to meet cabinet ministers, parliamentarians and staffers again this November. TMX lobbied successfully to have small public companies exempt from new rules on the taxation of employee stock options, matching the treatment for Canadian-controlled private corporations. And early in the pandemic, McKenzie rallied against rules that barred public companies from accessing government supports fully available to private businesses.
“We need to make sure being public isn’t such a burden that companies aren’t going to use the public vehicle to raise capital,” says McKenzie, who grows exasperated as he ticks off measures that put public companies at a disadvantage. Why, for instance, are small Venture-listed companies required to report quarterly instead of bi-annual results? Why are government supports for R&D among small companies more lucrative if they remain private? And why, on files like clean tech and clean energy, is there opposition to measures like flow-through share regimes that would encourage investment? McKenzie knows the answer to that last one. “In the bureaucracy there’s resistance, because when you do things through tax measures, you’re seen as helping rich people make more money,” he says, “but really you’re helping people put their capital into Canadian companies.”
At the same time, McKenzie has made it a mission to put TMX Group at the centre of the political battle for Canada’s economic future, inserting himself into the last federal election with a call for a long-term growth plan from Ottawa. “From the energy companies we’ve talked to, they’re not financing an expansion because they don’t believe the government is actually there to support expansion,” he says. “Canada is getting a reputation for being a difficult place to build things, and even if you get an approval, it doesn’t mean you keep an approval. All that is anathema to capital coming here, because capital is looking for certainty. That’s something we have to find a way to fix.”
It would be gullible to think McKenzie is being magnanimous in his advocacy. A lowered burden for public companies could lead to more new listings, which translates into greater trading volume, which in turn begets data it can monetize. Likewise, a federal government that’s more accommodating to investment would spur new financings and all the fees that come with that. That doesn’t mean there can’t be victories on both sides.
McKenzie’s work with Indigenous business leaders is a case in point. When a proposal last year from the Atkinson Foundation called on TMX Group to adopt a resolution on Indigenous inclusion and reconciliation—which was overwhelmingly supported by shareholders—the CEO threw himself into the file. “There are virtually no Indigenous companies on the TSX, even though Indigenous people are the fastest-growing entrepreneurial class in the country,” he says.
When Tabatha Bull, CEO of the Canadian Council for Aboriginal Business, suggested investors might find it useful if the TMX identified which companies are certified as part of its Progressive Aboriginal Relations (PAR) program, he added them to the drop-down menu of the TMX Money investor page, which draws more than two million unique views each month.
And here’s where McKenzie the advocate meets McKenzie the CEO: “I can see potentially making an index around that list, so you can track if they outperform other sectors. And if I can build an index on it, I can build an ETF so people can invest based on PAR principles, and that creates opportunities for capital to go to companies that are either Indigenous-led or have good Indigenous records.”
McKenzie is now looking at the barriers that prevent Indigenous companies from going public. To that end, his team is testing the waters on a dual-class-style share structure designed to allow Indigenous businesses to go public while preserving Indigenous ownership. Which, of course, could create a bounty of new listing opportunities.
“I’ve been really impressed with the TMX,” says Bull. “But we all know the leader of the organization really sets the tone, and I think that’s why they’ve made such progress.”
When McKenzie pops up on screen for a video interview, his left hand is in a cast. A few nights earlier, during a softball game, he broke his thumb trying to catch a sinking line drive to the outfield. If there’s a metaphor in there, it doesn’t relate to TMX’s most recent results for the second quarter—revenues were up 17%, to $286 million, from the previous year, while net income rose 19% to $92 million, ahead of analyst estimates.
Not everyone is thrilled with the pace of change at the company. “Am I impressed with John McKenzie as CEO? Not really,” says Barry Schwartz, chief investment officer of Baskin Wealth Management, which manages about $50 million in TMX Group shares. “I just don’t see any sense of urgency. They’ve been thumb-sucking on buying more data companies.” While Nasdaq and the LSE have been snapping up data providers, garnering higher valuation multiples, TMX has mostly been on the sidelines. Its largest acquisition lately was a $165-million deal in 2021 to buy AST Investor Services, a trust company, which didn’t exactly ignite investor enthusiasm. (As of late August, TMX shares traded for around 18 times earnings, compared to 32 times for Nasdaq and 57 times for the LSE.) “Let’s be a little less Canadian and a lot more U.S. in our actions,” says Schwartz.
McKenzie says he’s ready to do a big deal, but only when the right one presents itself. “There’s a danger in falling into the trap of needing to do a deal just because you need to do a deal,” he says. The company has at least $1 billion in debt capacity it can tap, and last December TMX filed a $2-billion shelf prospectus allowing it to raise new equity. “That gives us the capacity not just to do another Trayport but something even bigger,” he says.
It hasn’t helped that valuations for tech-related companies got wildly stretched these past few years, though the recent correction has brought multiples back down to Earth, says National Bank analyst Gloyn. “On the one hand, you can say it’s disappointing that no transaction has materialized, but this is a management team that is very disciplined and is going to allocate capital with the shareholders’ best interests in mind.”
McKenzie clearly has potential targets in mind. When asked what gaps he sees in TMX’s data offering, he points to the ability of Nasdaq and the LSE to create their own benchmark indexes. At present, TMX relies on S&P Global when it wants to create a new one. McKenzie would like to be able to create smaller niche indexes in-house, like a Venture 50 index. He even envisions a time when self-directed investors will be able to create their own custom weighted indexes that they can trade against in their brokerage accounts. To that end, he’s intrigued by companies in the crypto data space that have built their own indexing capabilities to see if the technology is transferable to other assets like fixed income, equities and commodities.
McKenzie calls this “the art of the possible”—a phrase he uses often. How successful he is at converting some of those possibilities into reality will go a long way in shaping what TMX Group looks like in the years to come.