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A passerby is seen outside the Toronto Stock Exchange at the Exchange Tower in Toronto, Ont. Feb. 7/2011. (Kevin Van Paassen/Kevin Van Paassen/The Globe and Mail)
A passerby is seen outside the Toronto Stock Exchange at the Exchange Tower in Toronto, Ont. Feb. 7/2011. (Kevin Van Paassen/Kevin Van Paassen/The Globe and Mail)

Putting a value on national stock exchanges Add to ...

Xavier Rolet wasted little time after his plane touched down in Toronto Sunday night.

After months of talks, the head of London Stock Exchange Group PLC was set to unveil a merger with TMX Group Inc., owner of the Toronto Stock Exchange. It would be Canada's most politically sensitive business deal since Ottawa blocked BHP Billiton Ltd.'s bid for Potash Corp. of Saskatchewan Inc. - and Mr. Rolet wanted to personally sell it to Canadian policy makers.

On Monday, the French-born executive and TMX chief executive officer Tom Kloet briefed Ontario Finance Minister Dwight Duncan on the coming deal. Then they hopped on a plane to Quebec City to see Quebec Finance Minister Raymond Bachand. Finally, they hit Ottawa, where they met with Finance Minister Jim Flaherty and officials from Industry Canada. Meantime, TMX officials in Western Canada met with British Columbia and Alberta policy makers. Each got the same pitch: The London and Toronto exchanges were poised to announce a "terrific merger agreement" that would keep regulatory authority in Canada, while handing the TMX a major role in a company that would be a more powerful contender in international markets.

What the emissaries didn't say about the deal was that the proposal is one of the few global opportunities left for two relatively small stock market players. Competitors have been bulking up with mergers for years, leaving historic financial temples such as the LSE and TSX looking increasingly regional. Indeed, the race to consolidate has become so intense that hours after the Toronto and London deal was unveiled Wednesday, the Deutsche Boerse and NYSE Euronext revealed they were in advanced merger talks to create by far the world's largest exchange company.

It will be weeks before Mr. Rolet and Mr. Kloet learn whether their diplomacy worked. During that time, provincial and federal regulators and politicians will have to take a hard look at the TMX's role in Canada's capital markets. It's the same dilemma soon to face regulators in the U.S. if the New York Stock Exchange is sold to the German exchange, and Australia is also grappling with the debate as the ASX looks to merge with the Singapore exchange.

Stock exchanges with such storied histories - NYSE was founded in 1817, TSX and ASX both date back to 1861- are deeply tied to their nation's identities, as well as their economies.

Already, Ontario's Finance Minister, whose government must approve the deal, has expressed concern that the deal is a de facto takeover by London and Canada could lose a "strategic asset." That echoes the argument Saskatchewan Premier Brad Wall used against the Potash deal in a campaign that won him huge popularity, which must be an alluring prospect to an Ontario government facing an election in October.

Quebec, which also must approve the deal, plans public hearings. And finally, the federal government of Prime Minister Stephen Harper, a minority that also faces the constant threat of an election, must sign off.

"The common reaction would be we don't want to give up one of our national treasures, and politicians are going to be sensitive to that," said Mike Pagano, a finance professor at Villanova School of Business and an expert in stock exchanges.

"You can argue the securities exchanges are national assets, just as you have electric utilities or other infrastructure."

But the relevance of the one main stock exchange in a country is in doubt. Upstart markets are popping up around the globe, including in Canada, offering competition and creating pressure on the incumbents like TMX. Profits from stock trading are falling for companies such as TMX, and that's a driving force behind of wave of consolidation that has sparked $100-billion of exchange deals in the past decade - one that long ago swallowed up the national exchanges of two other G7 countries, Italy and France.

From the business leaders who need the TSX to get capital, the reaction has been mostly positive, so long as regulators ensure Canada's interests are protected. Even passionate boosters of the exchange who were deeply involved in it when it was still owned by the Bay Street establishment believe that a new era has dawned.

"In our day the whole point of running the Toronto Stock Exchange was to make sure that Toronto continued to be in a dominant position," said Pearce Bunting, president of the exchange from 1977 to 1995. But the world has changed. "You don't need to have a huge exchange any more. Today, traders can place an order from anywhere and it flies around the world in seconds."

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