Hi, everyone. Thanks for being here. My name is Aravinda Galappatthige. I'm one of the TMT analysts here at Canaccord Genuity. Very pleased to have the TMX Group this morning to present the story. TMX Group, for those of you who are unaware, operates key global markets and clearing houses, as well as data and analytics platforms in the broader capital market space. In Canada, they obviously operate the Toronto Stock Exchange, the Venture Exchange, the TSXV, and then on the derivatives side, the Montreal Exchange, as well as on the fixed income side, Shorcan. They have an ownership stake in the Boston Options Exchange here, and then a sizable data and analytics platform, which is now creeping up towards 50% of segment EBITDA.
Very pleased to have David Arnold, the Chief Financial Officer of the company. Thanks, David, for being here. Welcome.
Thank you. Thanks for having me.
So I'll start off with a sort of a high-level strategy question. You know, when you look at the broader space, there's some commonality in terms of the approach adopted by your exchange peers with respect to gaining exposure to analytics and insights in the technology side of the business. I mean, if you look at what the Nasdaq's been doing with all their acquisitions, Adenza and so forth-
Yeah.
LSEG obviously buying Refinitiv a while ago, and even ICE.
Yeah.
You know, with mortgage software solutions, fixed income analytics. How would you kind of compare and contrast your strategy in that respect versus the group?
That's a great question, Aravinda, and so what I would go is really take it a step back, right? I think what our exchange peers have been doing is really trying to diversify into more recurring revenue sources. Obviously, that is very attractive for shareholders. It's very attractive for management. It creates a stable earnings base, and high-recurring revenue businesses tend to attract a better multiple. What you notice with those examples, specifically ICE, Nasdaq, and LSEG, is they're going about it very differently, right? So, you know, I look at LSEG and their core business, which was the London Stock Exchange Group. You know, last time I looked at it, it's south of 5% of the revenue contribution.
I would contrast that with, you know, the TMX Group, where our Toronto Stock Exchange and our Venture Exchange is really at the core of what we do. It's a 170-year-old franchise, and our power is the network effect of leveraging the information business that we are and really parlaying that into all aspects of the ecosystem, as opposed to really doubling down on just data and analytics. So we're all about leveraging through the entire ecosystem, and what I mean by that is, you know, think about it, right? We're able to work with issuers to bring an ETF to market. We're able to, you know, ensure that that is actively traded, and by listing on our exchange and venue, you get index inclusion, right? And then more importantly, is there's the exhaust of that is the data, right?
The data that we're providing both to, you know, consumers, whether they be retail investors or institutional, is highly attractive from a revenue flow and source for us. So it's leveraging all of those, and we've spent a lot of time thinking about: So how do you actually get more recurring revenue at TMX? And do we need to, for example, like ICE, go into something completely different, like the mortgage, you know, business or, you know, Nasdaq going into really providing financial software, right? And becoming a software provider. Our approach is really to look at what we believe is leveraging the core, right? And the most recent example was really adding TMX VettaFi to our stable, right? Which is index and benchmark creation for our clients and leverages our ecosystem.
I think the distinction is grow all parts of our franchise and not just focus on one core element.
Yeah, that makes a lot of sense. Maybe we'll start with VettaFi, 'cause that's been very topical since your recent acquisition. You know, I've spent a bit of time on the business. It's certainly interesting. It's in a great space.
Yeah.
You know, ETFs growing, what? 20% CAGR. You know, when you think about the growth rate that it's been having as an independent company, now under TMX's umbrella, I mean, what is the path to VettaFi becoming a much larger entity? Like, big picture, multi-year, maybe just,
Yeah
... thoughts on that.
So maybe I'll start with a little bit of the story as to how we actually came to own VettaFi, right? So, it's analogous to what we do at TMX across the board. We identified, after discussing with many of our clients, a need for custom index creation, and some have thematics that they want to replicate, others have some very innovative ideas. They might even want to create an ETF. And so we have a long-standing relationship with S&P, and they help, you know, provide our index and benchmark solution for the TMX Group for what I would call the key benchmark indices: S&P/TSX Composite, the 60. But when it comes to our clients' needs for bespoke, thematic-based indices and benchmarks, that's not quite the wheelhouse for S&P.
So we had a strategy of trying to build that capability. We started on the journey, and very quickly into that journey, Aravinda, we identified the VettaFi franchise and started having conversations with them, and it very, very quickly parlayed into we could have a commercial arrangement, a partnership, if you will, to provide that solution in Canada. So we pivoted from a build-it strategy to a partnership strategy. And then as we started talking to management, they had growth plans, and they were private equity-owned. The fund was fully deployed, and we had an opportunity to take a minority stake in the business, and right off the bat, we wanted to buy the business. We loved the management team. We loved what they were trying to do, and it wasn't for sale.
So we had this period where we were minority shareholders, and we had a front-row seat to the business. Parlay through about 12, 18 months, we had the opportunity to you know, conclude the transaction, which we did in December. As you said, we closed it in January, and the, the, the way that this can really help accelerate our franchise, and I use the example of, of, of, you know, ETF, is we can actually help an ETF manufacturer create that ETF. They can list on our exchange, they will trade on our exchange, so we will, you know, be participants there. We'll clear through our clearing houses, and using our network of clients, we've now been able to introduce many new clients to VettaFi that weren't even in their, in their kind of radar.
I'm looking for the multiplier effect as we continue the integration journey on VettaFi.
So maybe just sort of. It's been, I guess, 8 months, 9 months, maybe just touch on some of the low-hanging fruit, what you've done so far. Is it really—I mean, I know that VettaFi is predominantly U.S. business. Is it a case of introducing the Canadian entities, maybe something with Datalinx? Some of the, some of the integration synergies you've achieved so far.
Yeah. So I'll handle the integration synergies, but very quickly parlay to the more important stuff, which you touched on over there, which is how are we gonna grow the business? We didn't have a big thesis on, large-scale cost integration synergies. Very much, you know, it's about the productivity suite, so us bringing technology that we already have at TMX for Workday, for HR, Workday for financials, and our various different productivity suite, tools to VettaFi. We're six months through. We've just deployed all of that with our VettaFi team, and it's gone really, really well. We are focused very much on revenue synergies, right? And revenue synergies in terms of revenue acceleration for VettaFi.
We've done that first by putting together a joint sales team, which is TMX Datalinx and TMX VettaFi, and that's actually introducing TMX VettaFi to a whole host of clients, both in the U.S., but also in Canada, that weren't on their radar, and that's really, you know, gonna pay huge dividends. The other thing, which I will touch on, is, you know, we, we've always thought that there's an opportunity for us to monetize index data for natural gas and energy in Europe. Because Trayport operates out of our London office, but we haven't really had the capability to explore that. Now that VettaFi is part of our TMX family, that is something that we're looking at quite closely.
Okay. Well, that takes me to my Trayport question because, you know, one thing that struck me as I kind of understood Trayport is that, I mean, it's been growing very nicely. I mean, low, some, some cases mid-teens some of the recent quarters, and you kind of wonder, you know, "Can this be sustained?" But then at your Investor Day, you talked about, you know, you bring in oil, it doubles the business. You're just getting into the U.S., Japan, sort of the geographic ex-
Right
... expansion there. Maybe just touch on, like, what that path looks like, what the timelines are, to the extent that you can discuss that, and maybe a quick intro of what Trayport is for-
Yeah.
The-
So I guess the best way, let's do the intro. The best way, if people don't know what Trayport is, Trayport is effectively a software solution that we deploy. It is analogous to what Bloomberg is to fixed income, but for natural gas and energy in Europe, right? And so it effectively brings together a network of brokers and traders that wanna trade natural gas and energy over-the-counter derivatives, if you will, either to hedge positions or to speculate in on energy and natural gas markets. And it puts it all together on a screen that is a software as a service deployed by our business. We don't make money in Trayport per trade. It is a pure SaaS-based, subscription-based business.
We, you know, have an annual revenue retention rate over 100% for those that follow technology companies, that's something to be very, very proud of. We have built-in agreements with all of our clients for natural pricing increases each year based on Bank of England's Consumer Price Index . So it's a really well-run business by the team out of London, but it has started expanding, right? And so you've touched on that. So the first one is, you know, we started expanding into North America. Over the last 5 years, we've grown it at a CAGR of over 30%. Now, we're only generating around GBP 6 million out of the US, but that started from nothing, right? Almost 5 years ago, and so...
And to do that, it gets at your question, Aravinda, of timing, right? Like, how quickly can you do oil? Part of it is really looking at the history of Trayport. Trayport has just turned 30, right, a year ago, so it's only a 30-year-old business, and it was lots of hard work to get to what we refer to as the tipping point, right? You need enough brokers on the network, you need enough traders on the network for it to become the de facto source of transparency for both pricing and trade execution. As you move into Japanese power, as an example, as you move into other asset classes, whether it be oil, it's hard work, right?
It's you have to fight to get brokers onto the platform, you have to fight to get exchanges onto the platform, and you have to obviously fight to get traders onto the platform. So it does take time. But what I can tell you is that the North American journey of going from zero to 6 million is a good story over five years. I think we can do it faster as we go into some of these other asset classes, and a great example is two of the things that we added to our platform in the last four to five years, one was charting and analytics, and the other one was algorithmic trading. Those now make up 10% of the Trayport revenue base, right? So the multiplier effect is accelerating. Some of these asset classes, oil in particular-...
It's been tried by others. It's very, very hard to penetrate. We believe we have the experience to do it better than others because others were coming into it brand new. We can leverage what we've learnt in European natural gas and energy, but it is still hard, and it's gonna take time.
But the opportunity's there, would seem like.
Absolutely.
I mean, there is no Trayport-type offering in the U.S. or-
Right
in some of the other
Yeah, I mean, what you're effectively displacing in the US and in other oil markets is over the telephone, some of them using fax machines, some are using email, but that's as sophisticated as it gets.
So before we, you know, wrap up on GSIA, you know, the natural question is what's next? I mean, you've mostly integrated VettaFi. Obviously, it's a hot space. There are a lot of targets. You continue to de-lever. Your stock's doing well. What are your thoughts here? I mean, are you open to new M&A? Are you still as active as you were? Do you wanna pause?
Yeah. So definitely don't wanna pause. I use the analogy of we're actually very good juggling multiple balls at the same time, and a case in point is, you know, we closed on VettaFi. We have done a really good job of integrating it, but just under a week ago, we announced another acquisition. We acquired a company called Newsfile. It's very important for our strategy. As we've mentioned in previous discussions, we really wanna get into the white space that is for companies that are pre-public, but also companies that are public that have other issuer services that aren't being purchased from the TMX Group. So many years ago, we created the trust franchise, and then we did an acquisition from AST. We bought AST Canada, and it really gave us more size and scale to perform in that space.
But we'll probably touch on that a little bit later. Where we now pivoted with NewsFile is yet again another issuer service that gives us access to... They've got roughly 1,700 clients. 1,100 of them are listed businesses. We now have a front-row seat because they're a client of ours, and they're now TMX Newsfile , where we can introduce the trust franchise to them. So there's some opportunity there, and then what's really attractive to me is the fact that they've got roughly 600 clients that are not public. And those obviously are services we can provide to them, but also services that might lead to an IPO.
Okay. Makes sense. So let me get to the core exchange operations a little bit more here. You know, TMX is... I mean, if you track the market share, it's held firm really well for the last 7-8 years, notwithstanding the incursions from Nasdaq, Cboe, in particular in recent times, acquiring the NEO and MATCHNow. You know, maybe just talk to the moat that you have. What's allowed you to sustain your market share despite, you know, the competitive activity that-
Yeah
that we've seen here and there?
So there are a couple, and I'll first deal with cash equities and fixed income because that's really the place that Nasdaq and Cboe have really started to... And you used the word incursion. You know, they look, they have a right to play in our marketplace, but, you know, Nasdaq's been in the market for a number of years, and their market share really hasn't changed, right? It's held firm in the teens. You know, our market share is north of 60%. We run and operate the only clearinghouse for, you know, cash equities and fixed income, and we do clear for those participants, too, right? So we clear for everyone.
I think what's really interesting about the competitive moat is we only, you know, trade companies that are listed on our exchange. More importantly is you can only be included in the S&P indices if you are on our exchange, right? And so the place to go for IPOs, the place to go for listings is truly the TSX and the TSX Venture. Those other marketplaces have very limited listings, primarily because the moat is people want to be included in the index. When you look on the derivative side, and this is very interesting because Cboe, having bought NEO and previously, you know, MATCHNow , which was merged in, obviously, Cboe have a really strong presence in derivatives. We own and operate the only derivatives exchange in Canada, which is the Montreal Exchange.
We also own and operate the only derivatives clearing corp in Canada, and so I think that, if there were to be incursions, to use the word, in the derivative space, a few hurdles would need to be cleared. One is, how do you set up a new clearing corp? I'm not sure the Canadian banks would wanna do that. Or would they want us to clear for them? And then we would get into a discussion about appropriate pricing.
So let me just close up the loop on the trust side of the business, and we'll come to derivatives. You know, you've identified the trust side of the business as a growth segment, you know, low double digit, potentially, low double-digit growth. Can you just sort of provide the framework for that? Where's that growth coming from? What are the initiatives? You already mentioned one, but
Yeah
... maybe just kind of-
To reiterate, for everyone's benefit, right? So in our public documents, we do classify TSX Trust as a high-growth business. We trust it's high single to double digits. That business has lots of opportunity to grow, and some examples would be, and, you know, I'll just choose a couple off the top, so that it kind of gives people an illustration. The first is deepening the services that we can offer to our transfer agency clients, right? We have roughly 1,700 transfer agency clients in the business. They don't all consume employee share purchase plan services, right? Some might be with competitors like Solium Shareworks, right, you know, Morgan Stanley, Shareworks.
We now have a very competitive offering that we can bring to market, and we're starting to see, as new offerings are coming to market, we're winning roughly 50% of those bids. Our market share today is only 30%. It's a strong number two behind Computershare, but it's simple math, right? If we're winning 50% of the mandates, and we're at 30% market share, and Computershare in the low 40s, we're catching up. And we have every intention with that business, with the growth plans we have, to be have number one market share in Canada.
Okay, great. So getting back to derivatives, you know, one thing that kind of struck me is derivatives in Canada are clearly a growth business at this stage. Part of it is the under-penetration of derivatives in the country for various reasons that I'd love you to touch on. But, you know, we've seen the volumes come back. Q2 volumes were absolutely fantastic. Can you just talk to what's happening right now with sort of the new products you have on the interest rate futures side and some of those changes there?
Yeah. So the one that I would touch on that's the newest product that I think is really gaining a lot of momentum is, as we know, across the world, there's been a move away from, you know, traditional LIBOR-type rates. We've obviously launched this month, in fact, last month, July 1st, to CORRA and the CORRA futures, and so that's replacing the BAX, the kind of traditional bankers' acceptance to derivative. The volume has been remarkable. It's taken off incredibly well. There's tons of volume, there's tons of activity, and lots of demand, and I actually think it's a better product than what we had before, so that's fueling the growth. But what's also really fueled the growth is the strategy we had, and it started back several years ago when Luc Fortin joined.
We tried to reignite all parts of our interest rate curve, right? Like, we literally only had a few points on the curve. You had the short end of the curve with the BAX, and you had stuff way, way out there. We now have covered very much all of the points of the curve. So if you're a treasurer or someone trying to manage interest rate risk all along the curve, we have all the products for you to do it. You don't need to go over the counter. You don't have to worry about, you know, over-the-counter negotiations and long legal and paperwork. You can actually do it all on exchange, and that, I think, is part of what's enabled us to kind of get the kind of volume that you're seeing.
What's also very interesting, and I touched on it a little bit in previous discussions, is the way we ensure that the marketplace is active and really operating well, is to ensure that we partner well with the Canadian institutions, to ensure that there's enough market making in those arrangements. But when something becomes highly liquid and well-traded, it's a time for us to also sunset that market-making arrangement, and we did recently sunset our five-year market-making arrangements. So as we enter into Q3 and beyond, we will we believe that the volumes are now self-sustaining based on just pure market demand.
Your economics improve as the market makes-
Absolutely. Revenue per trade does increase as a result, yeah.
Absolutely. Just a quick question on the options side. I mean, what's your high-level take on it as far as the options market is concerned in Canada? Is it a retail problem? I mean, it's-
Yeah.
-regulatory. What's
So I think it's retail and regulatory. You know, I use myself as an example, Aravinda. I wouldn't consider myself the most sophisticated investor, but I know with my brokerage account, when I wanted to trade options, it was a tough slog, right? You know, "Do you know what you're doing? You know, you're getting into high risk." So there's just a lot of, I think, you know, nervousness and conservatism that is in our marketplace around retail options adoption. I contrast that with where we are right now in Boston, right? U.S. investors, retail investors are far more comfortable with options and derivatives trading than necessarily a Canadian retail investor.
So we see lots of action, on the institutional side, but on the retail side, I think it is conservatism, and I think a lot of regulatory kind of hurdles.
So that brings me to your U.S. strategy. I mean, you obviously have the Boston Options Exchange. You have VettaFi. You are close to, you know, I think you've said in your term, maybe the end of the year, early next year, you'll be launching the U.S. ATS. Maybe just frame for us your U.S. strategy and, and then, then how you think about sort of integrating your U.S. assets and building on from there.
Yeah. So that's a really good question, and it's multi-pronged, so if I forget any part of it, keep me honest, Aravinda, and ask it again. I think that... Let me start with kind of what we're doing in the U.S. and why these strategies are taking the shape that they are. So when it came to indices and benchmarks, obviously, we've acquired TMX VettaFi, and that's based and headquartered out of our New York office. We've also decided to create a U.S. ATS, as you touched on. We received FINRA approval. We're still in the process of getting SEC approval. That's actually a very interesting strategy for us.
We launched Alpha Exchange in Canada, and we have about 40 active participants in that space, and pretty much all of those 40 participants have operations in the U.S. and actively trade in the U.S., and they really like what they see with Alpha Exchange in Canada. So they said, "If you were to build some kind of facility with similar functionality and features in the U.S., that is a venue that we would really prefer to participate in." So that kind of is the genesis behind that strategy. We're also doing it because we have a golden opportunity to build something from scratch, right? How often do you get an opportunity to go into a marketplace based on client demand, but actually create next-generation matching engine technology, which down the road we could probably repatriate into Canada, too?
So as CFO, when I saw the business case, I said, "This is a win-win." You know, we get to create new technology, deploy it in the US, generate new revenue streams in the US, but also then, you know, repatriate it to Canada. The other opportunity that we have is how we can actually consolidate our teams under one umbrella or one premises in New York and really make New York the kind of, you know, head office for the US region. So looking forward to doing that in 2025. You touched on the, you know, BOX. You know, BOX for us is an interesting one. It's not part of our US growth integration plans, because really we are a shareholder in BOX. We don't own 100% of it.
We have a couple of large shareholders, Citadel and Interactive Brokers, who own a large, large stakes. Yes, we consolidated in our results, but that's really because we have a 52% voting right at the board. We only pick up 48% roughly of the economics. So, we don't have any plans for the U.S., you know, strategy to kind of integrate BOX. That's not part of the playbook right now. It could be in the future, but, it's not part of the playbook today.
Maybe again, to go back to the M&A question, that could be part of the U.S. strategy as well, right? As you look to kind of develop-
That's a good question, right? So, you know, we are, as I said early on, happy juggling many balls. We have the balance sheet capacity and strength to do it. We have the integration and staffing resources to continue to acquire. So we are looking in the U.S. at various different assets, but it's not just the U.S., right? So, you know, TMX VettaFi as an example, we're looking at a lot of things, right? We believe that we have a presence to play in EMEA, right? Europe, Middle East, India, and Africa. Asia Pacific may be down the road. So in TMX VettaFi, we continue to look at opportunities there, and there are others that we're looking at in the U.S., too.
Anything from the room as we get down to the last minute here? Maybe a little bit of time on the balance sheet-
Sure.
Real quick. I mean, you're de-levering nicely. Obviously, VettaFi took it over 3x. Where do you want to be? You know, how do you feel about maybe having to lever up again?
Yeah.
Like, what, what's your policy there?
So, so we've levered up in our organization multiple times over our kind of history. The largest we ever levered up was when the Maple transaction occurred, and you know, we were very, very quickly able to de-lever. The same was in 2017, 2018, when we acquired Trayport, right? We went, you know, 3.7x, and we were down to 2.4 within 12 months. The reason I have a public objective, Aravinda, of 1.5-2.5x, it's really the target capital structure for our company is I would like to see us not with 0 leverage and not with 10x leverage, right?
So it's really to give our shareholders comfort that through normal course operations, expect leverage to be between 1.5 and 2.5. But when we do acquisitions, we have lots of comfort running the leverage up to as high as even 4x, right? Because we have the free cash flow, we have the track record, 'cause we've demonstrated before, of the ability to pay down the debt and redeploy capital. And interestingly enough, we just bought Newsfile, and we are still on track to de-lever by the end of next year to be within our target, and we can actually afford-