TMX Group Limited ($X)

All right. Thank you, again, everyone. Last one here before we get to the exciting launch presentation from Stefan. We're joined -- I don't know if we've done this before, but -- two is better than one, I guess. So we've got on my right here, Luc Fortin, President and CEO of TMX Global Markets. And then further to my right, David Arnold, Chief Financial Officer with TMX Group. Gentlemen, thank you for joining us.

Thanks for having us.

I'll start with you, David nearing the end of Q1 '26 here. How is this quarter shaping up for TMX and relative to your expectations?

Yes. So I mean, we report our results for the first quarter in a little over 7 weeks or 8 weeks, first week of May. We do publish our stats, which I know Jaeme here is very keen student of. And really, we're very pleased with what we saw in January and February. And really, what I'd like to do is just talk quickly through the kind of 3 key parties of the business that will give you a flavor. So I'll start with capital formation. I'll then hand it to Luc to touch on markets, which he oversees and then I'll end it off with global insights. On capital formation, a really strong January and February from our stats, a lot of secondary financings some IPO activity, early green shoots. Some of the activity in the early part of March with what's going on in the Middle East, I think, has taken a little bit off on the pipeline. But the pipeline remains really, really strong as it relates to IPOs. What's been very interesting is our Corporate Solutions part of that business has really benefited to a lot of corporate actions, some net interest income pickups and so forth. So stay tuned for a new report in, as I said, 7 weeks or 8 weeks. And then maybe, Luc, just touch on markets.

Yes. Obviously, the beginning of the year where the Fed was a little tentative and central banks were a little tentative in terms of rate movements, saw derivatives be a little quieter in January, but then with the -- all the both constructive and destructive volatility that we've seen since the markets have just literally exploded our derivative business is doing exceptionally well. Our equity volumes are kind of similar to the levels we were seeing during the pandemic. So the only concern I have is around -- I often talk about the dichotomy between constructive and destructive volatility. And if we can get back to having a little bit clear line of sight in terms of where central banks are going and whatnot, that will probably appease investors. If the war continues to remain protracted, we'll see globally, what kind of impact that has on investor appetite.

Yes. And in Global Insights, I mean, which is really primarily the recurring revenue businesses, Datalinx continues to have a strong performance outlet. And it's really based on the jumping off point, right, Jaeme, where we ended Q4. Verify, our assets under index continues to grow and we're really proud of how that is performing as what we refer to as a high-growth business, which is high singles to double digits. And then finally, the business that we've owned and operated since late 2017, which is Trayport. Our natural gas and energy trading platform out of London continues to perform really above our expectations of high single to double digits. So we're off to a good start.

Good to hear. How about we jump into AI right away. Obviously, some investors, the share price perhaps reflecting that AI eventually some how it disrupts parts of the market data and analytics ecosystem. So how do you think about the risk for TMX, particularly within that global...

Yes. So it's interesting, Jaeme. I mean, we see more opportunity than risk. And we never want to say that the market has got it wrong, but we think that they got it wrong as it relates to our business. Sure, we're in some businesses where small elements could be disintermediated but we can actually do that to ourselves to do it better, faster, cheaper. The real secret source is most of our franchise is pivoted on what we call proprietary data. Right? So if you just break it down, right, like Trayport, it's bringing together a network of brokers, traders and exchanges. That data is proprietary in that environment. Could you use AI to replicate the software? Sure. But without the network connectivity, the software is meaningless. And then the same thing would apply to the other parts of our business, right, index and benchmark through VettaFi. Yes, you can use AI for a lot of the regression testing in the past, but the active portfolio recalibration and the secret source of how we will market and promote that is less AI disruptable. What we do see internally though is that, as I said, there's more opportunity. We think that there's a big opportunity for us to be more productive as a company. Our focus internally is on doing more with the same so rather than increasing headcount, and there are certain parts you might have to increase headcount. But a lot of the need for us to scale up can actually be done now using AI tools. We're a big developer, shop, as you know. I mean, we developed a lot of software in-house. So we're using a lot of the AI tools in there, too. So I would say the -- I'm being caught up in that broad swath of market correction. We consider it to be a little bit premature and unjust, but time will tell.

Yes. Yes. And you mentioned data as being the key moat here. And so the question around data then is whether improvements in AI and trading automation, analytic capabilities, does that actually increase the demand for high-quality data such that TMX has? Or on the flip side, does it risk commoditizing parts of that data ecosystem?

It's a great question, Jaeme. So really 2 parts, right? The first part is, the demand for the data continues to increase. And there will be an evolution of the business models as to how data is being charged. We've lived through this before when we went from a very much a point-to-point solution as it relates to data with the bulge bracket brokerage and trading purchasing data from us. And then the advent of algorithmic trading, high-frequency trading. So those business models continue to adapt. And I think it will be the same here. But the point that you touch on, which is really the key one is most of our clients are looking for raw data from us, whether they consume it using humans or artificial intelligence versus us actually using artificial intelligence to generate insights and then selling those insights because most of our clients want the unique ability to generate their own insights to develop their own trading strategy, right? And so that's why we see it more of an opportunity and less of a disruptor.

Yes. The other theme that's out there is tokenization and maybe, Luc, this is probably better for you. If tokenized assets become more widely adopted, is this something that you see TMX operating that type of infrastructure, trading of tokenized assets? Or again, the risk is do new competitors, new entrants emerge that can provide those capabilities?

I think when you look at tokenization, you want to sort of categorize that into 2 parts. One element of tokenization, where I think we have an absolute right to play is one where you're looking at creating means to facilitate payments. I think there's probably a lot of friction in post trade globally. There are financial institutions that are having issues during large global firms that are having the need to move capital around even within a variety of different balance sheets. Tokenization solves for a lot of these different things. Tokenization in the realm where it exists today, where it's happening in Asia and it's not a true replication of existing assets. I think that creates a bit of a problem because essentially, you're fragmenting liquidity, you're taking liquidity and you're taking it out the realms of where you would use these different securities to kind of gain leverage. I'll use another example. The other example is, one, when you talk about seeing Apple trading somewhere in Asia right now. What people don't realize that it's trading on going base or trading on these other digital platforms, they're not a true replication of the underlying asset. And very much like NASDAQ we're big believers you need to think about the issuers here. And when someone chooses to invest in Apple, it's not only to gain upward or downward exposure to it, you really want to have -- there's corporate actions. There's a whole series of things that are not being factored in. So the work that some of our, I guess, our competitors or cooperators in the U.S. are doing is really taking a firm stance and working with the regulators around let's establish what the rules are around tokenization. And the SEC has been pretty clear. These tokens are securities and DTCC has worked with -- coming up with some very interesting alternatives. And as you know, we set aside the most liquid market in the world, so to have significant market structure differences to them never works out well for Canada. So I think having the ability to follow what the U.S. is doing around tokenization. And what DTCC is doing is they're allowing these tokens to be replicated and they connect back to the actual registry. And what that fluidity does is it ensures that you're not fragmenting liquidity. So imagine Apple gets tokenized, you buy the equivalent of 100 shares of Apple you can trade it with someone. And when you trade at someone on payment rails, different payment rails in the traditional DTCC network, it will connect back into the registry and actually recognize this. that's great innovation. And we believe that that's probably a path that Canada will follow along. But as far as the other efficiencies that it brings around payments, you need to be able to pay that Apple, so some folks don't feel comfortable in paying it in bitcoin. Having these different tokens that have assets that could be used as a means of payment, I think, serves a purpose. And we, as sort of the central registry, the operator of the central registry in Canada in CDS and CDCC I think, leads to some great opportunities for us, and we're working very, very closely with our U.S. partners to see what the best solution will be for the market.

Yes. Yes, still a lot to work through, but TMX is certainly in the middle of that. Maybe a question for both of you guys. With AI tokenization, do you see this -- maybe this is more for David, but do you see this more as a driver of consolidation of what could be fragmented global markets capabilities or infrastructure that is coming about? Is that an opportunity for consolidation?

Possibly. I think the -- you really got to look at the asset classes first, Jaeme, right? Like I think on cash equities, when we talk about tokenization, it's not something that we're seeing a big institutional demand for, right? But as Luc touched on, I think that there is a ton of collateral management and funding and liquidity friction in the system that tokenization absolutely can assist the large bulge bracket institutional players. So I think it has a place, but it has a place in the right spot. And then when you layer on AI, the jury is out as to how some of our clients are going to be using AI, right? Are they going to use AI to really replace their traditional algos. It's really now a self-sustaining living, breathing, if you will, algo that is machine learning based with generative AI on top of. That's to be determined. I mean any of our clients when Luc talks to them they're skeptical that they can actually get their hands around it. One of the key things you're doing as a trading firm, when you do algorithmic trading is making sure that it does what your investment hypothesis is intended to be. And if it is being done, where it's actually thinking itself what you kill switch and how do you actually manage that? But Luc, I know you've got some thoughts about this whole ecosystem, too.

Yes. I think to imagine greater consolidation as a result of that, you're getting a bunch of innovation, and innovation is going to bring sort of new parties bringing new perspectives in terms of how you can use these new instruments. So I think competitiveness is great but I think you need rules of engagement. And we're finally seeing some rules of engagement and the U.S. administration is certainly putting a lot of pressure on modernization and thinking sort of outside the box to bring greater efficiencies to the marketplace. I've had and we've had the privilege of running markets for 175 years next year for TSX and 150 for MX. Innovation is in our DNA. So to see innovation happen, it just can't be innovation for innovation's sake. It has to be innovation that serves a better purpose. We'll be supportive of that. And I welcome this new innovation that's coming to market, we'll work very closely with regulators to make sure that the public interest mandates that we hold dearly are serving our clients well.

Yes. Okay. I think that's it's a good round of those topics. Maybe let's switch to some of the interesting growth strategies and initiatives that have been underway. Probably for you, Luc, the AlphaX U.S. that was launched over a year ago now, volumes are doing well. Maybe give us an update on how that platform is performing versus expectations. And then what are the priorities? What are you looking to do here in 2026 for the AlphaX U.S.?

So Alpha X U.S., for those who aren't familiar with this platform, this is our inaugural launch in terms of entering the U.S. equity market. And there are a variety of ways that you could do this, and we chose to be innovative to kind of compete on a different realm. So Alpha X U.S. caters to the segment of the market that is really focused on quality of execution. And this quality of execution market probably stands around 7% of the ADV that trades right now. Our view is that it will grow beyond 10% so when this thing launched early in 2025, it actually exceeded every benchmark that we had set for ourselves in terms of where some of our competitors that are in that realm are doing at the same period of time as we're doing. So a very, very good year. This is a long-term investment for us. So we're not watching this to say, hey, tomorrow, we're going to be at the maximum we can be for an ATS at 2%. We're seeing very good adoption. There is great engagement with the type of functionality that it brings the Alpha X hub allows how participants can kind of interact with each other. And that brought a lot of interest to bear. So we're seeing great onboarding, great uptake in terms of the innovation. We were recognized for a couple of prices in terms of technology. And again, just remembering that when you go and you innovate and you disrupt a different market, this is not in your own jurisdiction. But we're using this as a testing round, right? The U.S. is the most liquid market on the planet, and we've got new technology that was built for us that is actually driving this platform and longer-term plans are to take this technology and put it back into what drives all of our other markets here in Canada, including our derivatives business. So it's very exciting to see all of this innovation and what it's done for us. And there are new books that are being contemplated, additional functionality that will be added on to this. And just to give the audience a sense of the scalability of this business, and that's the beauty of when you're a small global market operator and you're going into the largest market. If we're successful with this, if we reach 1% of that 10-plus percent addressable market, that represents close to 50% of the entire revenue stream of our equity business in Canada, just to put things into perspective. So it's a -- we think it's a unique way to kind of enter a new market without just buying market share and trying to make a big push but that's one of the elements that we have in mind in terms of future growth for us.

What's really interesting there, Jaeme, is we've actually had Luc and I want some business development trips recently in the U.S. Some of the clients of Alpha X U.S. are now talking to the folks in Canada about trading in Canada, too. So an unintended byproduct, that's really a good outcome.

Yes, absolutely. And I mean you gave us some revenue sizing margins roughly similar to Canadian equity markets. Is that...

I think that would be fair. Yes, right.

One of the other initiatives post-trade modernization of heavy lifting over several years, but now it's almost been a year, I think it was this time last year it was launched. So what have you seen so far in terms of benefits operationally? And then I think more importantly for investors in terms of new revenue opportunities here for investors.

I mean, I could not imagine being in this environment with our old mainframe. Like imagine as this tokenization elements, the interaction of the digital world with the traditional world in the state that we were previously would not have allowed us to feel this comfortable in this type of environment. And we're actually ahead of the pack relative to a lot of like DTCC they're doing this, and they're in the midst of their own modernization. OCC is the same thing. There are a lot of other global CCPs that have not done this modernization. So for us, it took a while, but we got there. And I think the incremental efficiencies of a much more modern platform is to reassure investors that this is obviously very secure. You're no longer running on mainframe. There's no longer any operational risk so we're very excited at the prospects of future opportunities. Keep in mind, CCMS, which is the Canadian Collateral Management Service that was also launched last year, coincidentally with the launch of PTM. That is kind of -- imagine the new plumbing of the Canadian financial markets, the ability to move collateral around in a more efficient fashion, had we not modernized our post trade or CDSX. This is the main driving engine that powers a lot of the CCMS functionality that we've enabled. So that's just one example of probably many different things that we'll be able to do with this new modernized refresh for structure it's not sexy. It's the plumbing, it sits behind the walls, but it's so critical to Canadian investors.

And what's interesting here, Jaeme, and baseball seasons upon us. So I'll use our CEOs analogy, there are a lot of singles to be hit here. They're not home runs and massive needle movers, but you start adding up all the singles and as Luc is rounding out in that CDS ecosystem, what we can do to actually help individuals manage collateral. We touched on the tokenization, how we can help ensure that liquidity isn't being fragmented, I think is going to really pay dividends for us in the next few years. So I would watch the space quite closely.

Yes. Somethin maybe for '27, I guess, is kind of the idea that I'm picking up here. Just looking at the time here, maybe let's step up a little bit, get out of the weeds, TMX has long had the objectives of driving revenues, 50% outside of Canada, 2/3 recurring revenue, half coming from global insights. So walk us through that path and those targets. And then layer in how M&A is going to help to achieve those targets.

It's a great question, Jaeme. So in the interest of time, I'll try and be as brief as possible. I think each of those 3 transformational measures in quotes as we refer to them, they had a specific objective, right? So the -- our business, as Luc said, over 170 years old for the vast majority of our existence has been predominantly a Canadian business, which means we go as the Canadian macroeconomic goes. And what we decided as a management team and the Board that we wanted to ensure that we were at least a little bit more balanced so that geopolitical movements were really balanced in our results, and we weren't skewed one way or the other. So hence, the objective of, let's at least have greater than 50% of our revenue outside of Canada, right? And we're around 51% right now. We have no aspirations to grow that number much, much higher because it will literally be a function of how our Canadian businesses grow in the Canadian macroeconomic environment, how our non-Canadian businesses grow outside of Canada, right? So that's kind of the objective of that one, which is really to balance the earnings and at least balance the risk profile. The second one, which you touched on, which is really our Global Insights business, we would like that business to be half of the revenue of the organization in part because we saw the greatest opportunity for accelerated growth in that area, right? We saw ourselves not being in the index and benchmark space other than the work that we do with S&P. And so we said there's a lot of thematic bespoke work. That's an area we can play. If you're going to play in a whole new part of a vertical, that vertical is going to naturally grow, right? And so that's part of that stated objective. But we've been very, very clear, we don't want to starve the core part of our business, right, capital formation, corporate solutions, markets. And so it's really been a much longer transformational measure, which is -- it's something that if you look at it quarter-by-quarter, it hardly moves. But if you can zoom out 5 or 10 years, you will then start seeing the movement. And then last one is really to have 2/3 of our revenue be more recurring than transactional. But once again, we're not going to get there by starving our transactional businesses. We're very comfortable with the incredible transactional performance that we've had out of our markets business and out of our Capital Formation business. And yes, if that means it's going to take us a little longer to get to 2/3, so be it, right? And so that's kind of the macro overlay. And then M&A for us, we do not have an M&A strategy, if you will, Jaeme. We are all about our corporate strategy for growth. M&A is just one of those areas where we can accelerate it, right? And sometimes, we choose to build it ourselves, sometimes we choose to partner, and sometimes we choose to buy. And so hence, there's more the M&A is in that third leg. But AlphaX U.S. is a great example. We chose to build that from scratch. And we did an outstanding job, and we've got that done within 18 months and it's exceeded all of our expectations so far. So that's kind of the high level, if I take it up to the top.

Right. And then in terms of like the M&A pipeline, it's been, I'd say, relatively active for TMX. So what's that outlook here for the next 12 to maybe...

So I can't talk about what I can't talk about. But what I can tell you, Jaeme, is that we look at a lot of things. They are all rooted on, as I said, a minute ago, our strategy and accelerating the strategy. And as we've said repeatedly, we are not shy to do M&A in capital formation or in markets it's not all just about our Global Insights business. And what I can tell you is the portfolio of businesses that we're looking to expand into is quite balanced. Now depending on when we get certain things over the finish line, if we do, they might skew one way or the other. But if you give us time to have the fullness of our aspirations for growth kind of come to fruition, you'll then be able to see that it's not just skewed towards one part of the business. It's quite diversified. For example, adding news file to corporate solutions was very, very important for us because we see a lot of white space there to support companies. So at a high level, stay tuned. And if we've got something to report, we will put out a press release, and we'll call it in an analyst call.

Excellent. We're right out of time here. Any final thoughts to leave investors with today from either.

The thing that I would leave you with before I hand it to Luc we are on it. We think that there are some fundamental shifts in the marketplace. Some of it is a little bit more hype than reality that's our job. Our job is to kind of cut through the chaff and figure out what we need to pivot. We've often spoken about being a fast follower, and I'll hand it over to Luc because I think that's part of how we see the tokenization digital.

Yes. I think for us, the focus is to get -- to continue doing what we've excelled at for all these years is innovation. Bringing innovation to our participants. We really are a big believer in the community involving the entirety of the ecosystem to help build things together. And as we globalize, what's interesting is that these partners that we were talking about we were in Boca a couple of weeks back. And the amount of interest in Canada is absolutely spectacular, and it's coming to us to say, hey, how can we partner with these existing firms that we're doing business with to bring Canada the world and vice versa bring the world to Canada. So in our view, a lot of the interesting growth opportunities for us in the years to come. And it's the working model that we've been espousing for a long time that seems to be working. So why fix something that isn't broken. Keep doing the same thing.

Excellent. We're there. We're out of time. Everyone we'll see you at lunch and gentlemen, thank you again.

Thank you.