TMX Group Limited (X) Earnings Call Transcript & Summary

We haven't, right? The amount of derivative trading that is retail based in Canada is really dwarfed by the institutional trading. There's a lot of the trading in Canada on the kind of derivative complex would be interest rate futures. That really would be the largest part of the average daily volume. Single stock futures, options and the like are quite niche. And really, I think it is drawing that parallel between the ability for the Canadian investor to invest really in the underlying as opposed to the synthetic or the derivative. Institutionally, it's very, very much on par with the U.S. The problem is we're not seeing that translate into institutional demand for prediction market outcomes. But that being said, we announced earlier this year that we're bringing together the Boston Options Exchange and MEMX. We're going to form the MEMX Group. So one of the first things that the team at MEMX have announced is we are intending at MEMX Group to actually do prediction markets based on earnings in the U.S. So that is something that we announced very, very shortly after announcing the transaction. And I think that, that is something that we could replicate in Canada, right? Prediction markets on -- is the company going to beat consensus? Are sales going to grow more than 10%. Those are quite empirical and really the measurement of the prediction or the outcome is a lot more assured. Some of the other prediction market synthetics on election outcomes, the temperature for the day, those are a little bit further away from our kind of knitting.

Okay. Got you. Well, we do write a lot of earnings stories, including Bloomberg consensus. So I'm starting to think about where this is going. I mean I wouldn't be allowed to be a part of this anyway. Okay. Great. Yes, I mentioned I would talk to you about another thing that seems to be becoming more prevalent in the U.S., which is 24/7 trading or at least close to it. Yes, we have Nasdaq, NYSE and LSE moving to trading at least 23 hours a day, 5 days a week, so 24 -- eventually 24/7. But that's a lot. So what are your thoughts?

Yes. So much like the other topic, it's really client-driven for us, Melissa. So -- and then you actually bifurcate between the Toronto Stock Exchange, which is really cash equities, if you will, and the Montreal Exchange, which is our derivatives trading venue. The Montreal Exchange due to client demand, we, several years ago, 6, 7 years ago, offered to do it in European time zone. So we extended the trading. We've actually now gone to Asia Pacific time zone a couple of years ago. So it's almost a 23/5 complex, if you will. So we know how to do it. It's not something that we can't do. But doing it for cash equities, publicly listed companies is something that really has to be thought through. How does one deal with a stock halt in the middle of the night? How does one actually deal with news dissemination or a corporate action, right? Some of these things that some of the more innovative emerging DeFi businesses maybe haven't fully thought through. We take our role as a market infrastructure provider very, very seriously. And so for us, -- it's ensuring that the investors are protected and that the companies can flourish. So we are looking at it. If there is enough demand, we will be very, very quick to follow suit. I think for the U.S., it does make a lot of sense. There are the Magnificent 7, some other large corporates that I think will see both European and Asian trading really in our early hours of the day. I'm just not so sure the demand is there for some of the Canadian corporates. But once again, offering it is not that difficult. As I said, we've done it before. The question will really be is do we offer it? And do you actually see the demand in 2 a.m., 3 a.m. trading. Time will tell.

Yes. Fair enough. You mentioned the need to understand demand a couple of times. You mentioned with prediction markets, the idea that institutional demand is important, and then we just talked about it now as well. How do you gauge that? What do you look at? Do people write you letters?

That -- yes, we do get letters. But generally speaking, it's actually industry consultation. We spend a lot of time in our markets team and in our capital formation team as well as our global insights team with our clients. We spend a lot of time in consultation forums. We hosted one not too long ago in Canada that really brought together a lot of the thought leaders in industry and on Bay Street, if you will, to really hammer out like what do you need? And what are you seeing? And I think that is part of it. But most importantly, it's just constant dialogue with our clients, our client relationship teams across TMX. That is kind of job #1 is listening to what is the want and what is the need and maybe not trying to predict hate to use the phrase again. It's better to ask. It's better to build what our clients need than to dream up something in the laboratory and then bring it to market. It stands a better chance of success when it's actually a client-driven demand because the follow-on from that then catches fire.

Got you. So I kind of dreamed up 2 things. What are they asking for?

So effectively, what our clients are asking for is better clearing and settlement services, collateral management. We launched something not too long ago with Clearstream. We refer to it as CCMS, the collateral management system. And it is really trying to optimize for a lot of these institutions under various different regimes, whether it be Basel III and so on and so forth, their optimization of posting collateral, right? Back office lags in the space. Dare I say, we didn't touch on tokenization, but the ability to tokenize cash equities is really something that I think is -- that's not the problem that really needs solving. There's a lot of over-the-counter fixed income product that is quite analog. That could be tokenized or digitized. And I think that when you do that, then you find an ability to post collateral more seamlessly. So that's something that we've heard a lot from our Canadian clients. And we're addressing that need, as we said, with CCMS and a few other things we have in the pipeline.

Got you. Okay. And you mentioned the M&A that you've done recently, MEMX, BOX and then also Cboe Canada and Cboe Australia. So I understand Cboe Australia has closed and Cboe Canada?

It is still under review. So -- all of the ones that you mentioned will be under some form of regulatory scrutiny. The BOX-MEMX merger to create MEMX Group will obviously go through the HSR and the SEC process here in the U.S. Obviously, with Cboe Australia, that's now rebranded TMX Exchange or TMX Australia Exchange. That business went through a pretty quick regulatory review. We worked very closely with the regulator there, ASIC. And so that was pretty seamless for us. The Canadian one is a little bit more lengthy, if you will, but the filings are proceeding as planned. And so we have no cause for concern. And then yes, the one that you didn't quite touch on is our acquisition of the RAFI Indices. So that's a business as part of our index and benchmark part of TMX franchise, TMX VettaFi to be precise. And that's something that we're very excited about because it really 3x our assets under index in that business. So somewhat of a game changer for that part of the business, and it really once again diversifies the portfolio of the company. So it's really good.

Great. Great. One of the things that I have heard in terms of people's concern about the Cboe Canada and TMX merger is just this idea of a little bit less competition in the Canadian market. How do you respond to that?

So we have a number of competitors in Canada. There are over 10 to 14 different exchanges with varying different degrees of percentages. This is really about simplifying it for our clients. The Canadian broker-dealers have to connect to every single one of these venues. Consolidating some of the venues, I think, is in their interest. When we talk to our clients, they know that when we switch to T+1, there are many, many venues, and they have to change all of the systems. So I think there is a sweet spot in Canada. I don't think 10-plus venues is the right number, a smaller number, and this is just one step in that direction.

Well, that makes sense. I think we'll leave it there. Thank you so much, David.

Thank you, Melissa.