The new head of TMX Group Ltd. says the stock exchange company needs to diversify and develop new technology products to help counter the impact of Canada's highly cyclical commodity-dominated markets.
Lou Eccleston, who was named CEO of TMX in October to replace retiring Tom Kloet, met reporters for the first time on Wednesday to outline his strategy for the company, saying the key to future growth will be to develop technology at the Toronto Stock Exchange and other divisions – including TSX Venture Exchange, the Alpha trading platform and the Canadian Depository for Securities – to offer new services to clients.
"What we can't do is simply let them all sit as totally separate entities," he said. "They all run as verticals. But the challenge is how do you take those things and understand how to use the capabilities to create more integrated solutions that give you some competitive advantage?"
A more immediate challenge, however, is a recent slide in oil prices and ongoing low commodity prices that are hitting resource companies that are the backbone of the TSX. New data products could add income streams that are less cyclical, he says, offsetting some of the impact to the TSX when resource companies become far less appealing to investors.
While resources will remain a critical sector, he said the TSX can also broaden that scope.
"You could diversify by targeting other resource groups – you could go clean tech," he said.
An American with a deep background in data management, Mr. Eccleston was a surprise appointment as TMX CEO because he was virtually unknown on Bay Street.
He said he was approached about the TMX position in the summer, just months after he quit his job heading financial data provider S&P Capital IQ, a major division of McGraw Hill Financial Inc. with annual revenue of $1.7-billion (U.S.) last year.
Mr. Eccleston said he felt it was time to leave McGraw Hill after six years because there had been a complete overhaul of management at the company, including a new CEO appointed late last year.
"They went through some major changes. From when I started six years earlier, it was an entirely new management team," he said. "I think we had really succeeded – it was nice to go out on my last earnings call for S&P Capital IQ with record earnings.... Different team, different time, and I thought it was time to declare success and move it into a different phase."
Mr. Eccleston is living in a temporary residence in downtown Toronto and said he and his wife are searching for a permanent home. He said he wants it to be walking distance from the TMX office because he is weary of long commutes.
"Thirty years I was on the train commuting to Manhattan – this is the first time in my life I walk to work, so it's been very nice," he said. "I'm going to walk, even in the winter. I've bought big boots for the first time, and a big coat. At least I'm going to say that for now - we'll see how long it lasts."
Mr. Eccleston is already familiar with Canada, saying he travelled to the country frequently while working for Bloomberg for 14 years on electronic trading systems, and again while working at McGraw Hill when the company acquired Toronto-based R2 Financial Technologies.
He said one of his key responsibilities at McGraw Hill was to integrate an array of different companies into two new companies – S&P Capital IQ and S&P Dow Jones Indices. He said that experience will help him create a strategy for a portfolio of TMX businesses.
"I think it's time to start thinking about TMX as not a group of exchanges and clearing businesses, but really a very strong technology-based organization that happens to manage exchanges, clearing businesses, risk-management business, data businesses and a number of other things," he said.
The challenge, he said, is "just a perfect fit based on what I've done the last few years."
TMX is facing growing competition from alternative trading systems, which have eaten into the exchange's once-monopoly on stock trading in Canada. In November, regulators gave the go-ahead for the launch of another new exchange, the Aequitas Neo Exchange, which has powerful backing from an ownership group that includes Royal Bank of Canada, IGM Financial Inc. and OMERS Capital Markets.
The exchange is seeking to lure major institutional investors who don't want to compete with high-frequency traders who can get a speed advantage in pricing on other systems. Asked about the potential loss of business, Mr. Eccleston said the TSX already has many competitors, and cannot compete by matching them in every service niches.
"The bottom line is that if you only respond, you're replicating," he said. "And if you're only replicating, you're going to compete purely on price."
Mr. Eccleston was less sanguine about the loss of order flow in Canadian stocks to U.S. exchanges, a trend driven by the ability of U.S. trading venues to pay Canadian brokers for routing their business to them. Such payments are not allowed in Canada.
While stating that he is not proposing a solution to the problem, he nonetheless told reporters there needs to be "a level playing field" when trading crosses the border.
"I think the issue there as much as anything is just make sure it's a level playing field. In any of that, we just want to be able to compete."
He said he hopes to articulate his "expanded strategy" for the TMX by middle of next year for execution over the next three to five years.