The Canadian trade operator TMX launches 23-hour buying and selling in derivatives to draw Asian buyers

© Reuters.

By Nichola Saminather

TORONTO (Reuters) – The owner of Canada's largest stock exchanges is looking to attract more Asian derivatives investors in order to increase the proportion of its total revenue from outside the country from the current one-third to half.

TMX Group, which operates the Toronto Stock Exchange, TSX Venture Exchange, and Montreal Exchange, plans to extend derivatives trading from 14 1/2 hours to 23 hours in the second half of 2021 to keep institutional investors out of the Asia-Pacific attract executive John McKenzie told Reuters in an exclusive interview.

"We have had a dialogue with asset managers in these regions. We know there is a need to gain access to North American products," said McKenzie. "But we're not making it easy to get to Canada."

Late last year, TMX added two-year government bond futures and new environmental, social and governance-based stock futures, McKenzie said, and plans to introduce 30-year interest rate and stock dividend futures this year.

According to McKenzie, TMX hopes to expand both outside of Canada and beyond its traditional stock trading businesses, which accounted for less than a tenth of its revenue in fiscal 2019, half a decade earlier.

"The general view is that the stock trading business is a little more mature and very competitive," said Colin Stewart, CEO of investment manager JC Clark. "Derivatives are more of a growth area."

TMX hopes the derivatives push will help meet its double-digit earnings growth target. This, in turn, could raise the share price. Shares rose 5.8% last year, far less than the 14% gain for Singapore Exchange (OTC 🙂 Ltd, 20% for Intercontinental Exchange (NYSE 🙂 and 79% for Hong Kong Exchanges and Clearing Ltd.

Revenue from TMX derivative offerings traded on the Montreal Exchange increased 21% in the fourth quarter of 2019 compared to two years prior to the expansion of trading to European business hours.

CAPITAL FLOWS

Pension funds in the Asia-Pacific region are seeking more global investments in managed assets, which have grown faster than other regions, according to a September report by Willis Towers Watson (NASDAQ :).

"Capital has become a lot more global," said Marius Zoican, assistant professor of finance at the University of Toronto. "If you don't serve the European and Asian markets, you have blind spots … If your market is open, there is information that has already been processed in other markets."

According to Statistics Canada, net flows from Japan to Canadian bonds increased by over 300% in the first eleven months of 2020 compared to the same period last year.

Improved access to products like interest rate futures will allow investors to take risk in Canadian bonds or hedge existing holdings, McKenzie said.

After TMX expanded into European hours in 2018, trading in derivatives from the region added between 6% and 10% to volume in 2020, he said.

International peers with global trade have 15% to 30% of the total volume that comes from meetings outside of business hours. They also get up to 60% of trading in derivatives from outside their home markets, up from 40% with TMX, McKenzie said.

"That's the upside … this is what success will look like if we do these things well," said McKenzie, who became general manager in August.

TMX is working with Canadian participants to ensure market making happens all night, McKenzie said, adding that the cost of extending working hours is not great.

However, the Canadian market remains small and flat compared to the US and Europe, so attracting investors could be an uphill battle for TMX, JC Clark's Stewart warned.

Even so, recent political turmoil and uncertainty in the US make Canada more attractive to global investors who view its stability and strong regulation as a plus, Zoican said.

"People in Europe and Asia consider Canada to be America's little sister," he said.

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