© The Canadian Press
Xavier Rolet (left), CEO of the London Stock Exchange, and Thomas Kloet, CEO of TMX Group, hold a news conference in Toronto on Wednesday to announce the proposed merger of the London Stock Exchange and the TMX Group.
TORONTO — The sky-high market values of major stock exchange operators may have come as a surprise to Canadians before they learned of a merger that could see the administrator of the country’s key market join forces with its British counterpart.
The veil was peeled back on the lucrative industry when the TMX Group announced it was merging with the London Stock Exchange (LSE), resulting in a company worth at least $6 billion.
Similar operating principles helped the two stock exchange administrators accumulate their staggering wealth, said Andreas Park, associate professor of economics with the Rotman School of Management at the University of Toronto.
“What an exchange (operator) really does, it supplies a service,” he said in a telephone interview. “It controls the companies that list on the exchange, and it controls the environment in which the trading can be managed.”
TMX Group accumulated its nearly $3-billion market capitalization by charging to provide these services, Park said.
Listing fees, data sales and charges associated with making transactions account for the bulk of the company’s revenue, he said, adding that the London Stock Exchange operates much the same way.
Trading activity is the most lucrative income source for TMX, Park said, explaining the company receives a fraction of a penny for every share that is traded over the Toronto Stock Exchange. Similar rules govern the other six exchanges the group owns.
Another key source of revenue comes from the sale of data, Park said.
Brokers, individual traders and corporations all rely on summaries, statistics and other information documenting activities during a trading day. Subscriptions to the TMX data feed account for a significant portion of the company’s sales, he said.
Businesses listing on the group’s various exchanges make up the third key revenue stream, since each company must pay a fee in order to be eligible to trade on an index.
That fee buys more than just listing privilege, said Mark Kamstra, professor of finance at York University’s Schulich School of Business.
Exchange operators take on some basic administrative and regulatory responsibilities for the companies they list, he said, adding these efforts ensure prospective traders can conduct their business regardless of their financial literacy.
“Exchanges help perform some of that regulation, and they charge companies for monitoring whether or not they meet the regulatory requirements of the exchange,” Kamstra said.
If the proposed merger between TMX and LSE closes, the resulting exchange operator will operate nine separate exchanges with a total of 6,700 listings.
In Canada, the deal requires approval from the federal government, as well as securities regulators in Ontario and Quebec.