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Nasdaq takes step toward Canadian exchange

This file photo taken on June 16, 2015 shows people walking past the Nasdaq MarketSite in New York's Times Square in New York City.

KENA BETANCUR/AFP/Getty Images

The Canadian arm of Nasdaq Inc. has applied to operate an exchange in this country.

Nasdaq filed an application to become an exchange with regulators in December, about one year after the New York-based operator announced it had agreed to acquire equities trading venue Chi-X Canada to expand its trading business beyond the U.S. and the Nordic countries.

Details around what kind of exchange Nasdaq has proposed to operate in Canada have yet to be made public. A spokesman for Nasdaq declined to elaborate. A spokeswoman for the Ontario Securities Commission declined to confirm whether the regulator has received an application from the company.

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For a market such as Nasdaq, exchange status could grant it permission to expand beyond trading and begin listing issuers, which would generate initial and yearly fees for exchange and boost other areas of the business such as trading. An exchange could also be able to establish a formal market-making program, which could boost the order flow handled by the venue.

Nasdaq, which operates in Canada under the name Nasdaq CXC Ltd., talked publicly about its exchange application in a letter e-mailed this month to clients, which was obtained by The Globe and Mail. In the e-mail, Dan Kessous, chief executive officer at Nasdaq CXC, says that the foundation has been set for the company "to compete across a broader set of opportunities."

"In December, we filed an application to become an exchange," Mr. Kessous wrote. "We are excited to move this forward, as we believe this allows us to provide innovative, cost effective products and services to our clients throughout the Canadian marketplace."

With this filing, Nasdaq is taking its biggest step forward in Canada since acquiring Chi-X. Its Canadian expansion is being closely watched by brokers, investors and other venues because many people believe that Nasdaq could pose the biggest threat to TMX Group Ltd., the country's dominant stock and derivatives exchange operator.

But this clash could take a while to play out. The process of applying for exchange status in Canada is often lengthy and complex.

When Nasdaq agreed to buy Chi-X in 2015, industry observers speculated that Nasdaq would soon use its trusted brand and technology prowess to compete against Toronto-based TMX across a slew of areas, including listings, trading, market data and clearing. Shares of the TMX quickly tanked, reaching the low $30s at one point.

But Nasdaq has been slow to roll out new initiatives in Canada, spurring a dramatic comeback in shares of the TMX. Its stock has more than doubled since December, 2015.

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Nasdaq currently runs three trading facilities in Canada, where securities listed on the Toronto Stock Exchange and the TSX Venture Exchange can be bought and sold. In 2016, these markets handled an average of 16 per cent of the total volume traded in Canada, according to the Investment Industry Regulatory Organization of Canada. The three markets operated by the TMX – the TSX, TSXV and Alpha – controlled 66 per cent during that time.

There are other Canadian exchanges that compete with the TMX for listings but they have yet to make a serious dent. The Canadian Securities Exchange, which is run by CNSX Markets Inc., has 318 listed securities of mostly early stage companies.

The Neo Exchange, which is operated by Aequitas Neo Exchange Inc., has been slow to attract listings since its debut in 2015 and has added just six ETF listings. It has plans to add 24 more ETFs to its roster and is striving to have more than 80 ETF listings on its market this year. It says it can hit this target by the end of the second quarter.

Since January, Nasdaq in Canada has been busy migrating its technology from Chi-X's platform to Nasdaq's, with these upgrades and related testing occurring into May. It is also relocating to a new data centre in Toronto and moving its disaster-recovery facility to Chicago. Nasdaq also serves Canadian issuers today through its investor-relations services and news-distribution company Marketwired.

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