Good morning, everyone. Welcome to the 24th Annual Credit Suisse Financial Services Forum. This is Gautam Sawant, Credit Suisse's Equity Analyst covering US exchanges. It is my pleasure to introduce John McKenzie, TMX Group CEO. TMX provides listing and capital formation services for Canadian corporates and operates equity, fixed income, derivatives, and energy exchanges. John, thank you very much for joining us.
It's a pleasure. Thank you.
For investors newer to the story, can you start out with an overview of TMX's business and the firm's strategic priorities?
I'm happy to. Let me start with the actual pieces that are in our franchise and then how we organize it. As you were saying in your intro, we operate the senior market, the junior market in Canada, the primary derivatives market. We own the clearinghouses for both derivatives and equities and fixed income. We operate a trust company to support the listed issuers as well. In addition to that, we operate TrayPort, which is a platform for aggregating the European and global as we're growing energy markets. Within that franchise, we organize ourselves around four key pillars: capital formation, equity trading and clearing, derivatives trading and clearing, and global solutions inside Analytics, which is essentially data analytics, both in traditional market data and in new data aggregation platforms like TrayPort. Our growth priorities are quite simple.
We're looking to grow all parts of this franchise and expanding on the levers of going more global than local. We're today, about 38% of our business is outside of Canada, the rest is inside. We're looking to be more recurring and more data analytics. About 50% of our business is recurring revenue streams today. That has been growing over time. We're looking to build that as high as 65% in our long-term objectives, and also similarly building our data analytics franchise to being half the organization. That's our focus for growth going forward, all on the basis of serving the clients better and meeting their needs.
As a follow-up, TMX recently announced a 5-for-1 stock split. Can you explain the strategy behind that decision?
The strategy is really simple. it's not a lot of downside on it, and what we're really looking to do is help to build more liquidity in the stock for more investors to be able to get into the name more easily. you know, recognize that a stock split doesn't change technically the value of the company, but given that we've grown since our last split from, call it $27 a share to $138, we do wanna see more liquidity in the stock in terms of being more attractive to a global audience.
The company itself, we were part of a leveraged buyout about 10 years ago, and prior to that had much more liquidity, much more international holdings in the name, and we've been rebuilding that over time, and we really think that this next step of splitting and adding more float is gonna help bring more retailers into the name, more international traders as well. It makes it easier for market makers to trade the stock at that price point than in the 100-plus price point.
Can you provide us with an update on your economic outlook and how macroeconomic factors could affect the firm's financial performance in 2023?
I mean, the no surprise in the economic outlook update is, it is a tough time for capital raising still. You know, we came through 2021 in what was one of the best capital-raising markets in our history, which I know is the same in a lot of other markets that you cover as well. In 2022, that evaporated with pricing pulling back. Driven by a number of factors, inflation concerns, geopolitical concerns, interest rates rising, all took a dent in terms of market valuations. What it looks like going forward is unique, and this will get to what's unique in terms of our business, in terms of how well balanced it is now going forward, even on that backdrop, we grew our issuer base again last year.
We've had 7 years in a row of actually expanding the base of listed companies we have. We start 2023 with an even bigger base of companies that can raise capital when conditions improve. When you look at the conditions for marketplace, one of the biggest changes coming into 2023 right now is we now have stabilization in the interest rate markets and the inflation market. Interest rates, which were the central bank was rising very quickly in an unpredictable way, have now stabilized, which has allowed interest rate product trading to come back into the market. It's allowing for more stability in valuations. We believe that we're gonna see more public offerings come back, more secondary financing come back.
Quite frankly, with a big base of companies that may need to rebuild their balance sheets, rolling their debt just got more expensive, you know, at 5% base, where it might have been 1% a year ago. We will see more demand for equity capital raising. Every market cycle and market correction that we've seen in the past, that's exactly the trend you've seen.
As things stabilize and companies come back to rebuild their balance sheet, you get some of the biggest capital-raising markets coming on the back of a step-down. That's where we think we actually have some really positive economic tailwinds to push us forward, because we're already seeing the derivative trading coming back with rates normalizing. There's a potential for financing activity to return, both in public offerings, but really in secondary offerings. The trading levels have actually stayed pretty strong, even coming out of COVID. The conditions are actually really strong for us.
Maybe digging a little deeper into capital formation, you know, there's a positive outlook for domestic IPOs, but what is attracting international corporates to list on the TMX platform?
Two big things that makes us unique. One thing in terms of the global perspective, we are the best market for listing resource companies, particularly mining company. We have the biggest mining portfolio in the world. A lot of international companies that are global miners will use our platform either on the junior market, the Venture Exchange, or the senior market to list for their, for their international secondaries. What really makes us unique is that TSX Venture market. No one else in the world operates a junior equity market at that scale with public investors and private equity coming into it. With that, we're able to attract global small-cap companies that wouldn't have a public option in their home market, like even in the US We have over 240 international names today.
We're number two in the world for international names and number two in new international listings. The US is the biggest source of them. They tend to be across all sectors. Then when we look forward, because this is a pipeline that we actively manage, we have over 1,500 companies in our active pipeline of companies that could list with us in the future. Over half of them are outside of Canada, and the majority of them are also tech companies. It's part of the industry shifting from resource and old industry to new industry. Most of our pipeline is tech companies, and most of it's international. I'll give you with it a really good case study example.
We went into Israel a number of years ago because we saw Israel being a great incubator market, but didn't have the ability to scale companies up with the capital that they have in country. The big companies were going to Nasdaq, but the midcap companies had nowhere to go to scale up. We put resources on the ground there. We've got full-time sales and development in Israel that's working on those companies to come and list and raise capital in Canada. We've listed 17 new names out of the Israeli market through that campaign, where we provide that sweet spot for a small and midcap company that can't get the same lift at home.
What are TMX's competitive advantages within corporate listings, and can you touch upon the details of index inclusion rules?
We only in the indexes that we provide, the partnership we have with S&P for the S&P/TSX suite of indexes, you need to be listed on TSX and TSX Venture to be included in the index. It does make a very strong competitive advantage in terms of the listing regime in Canada, that if a company wants to be able to be index eligible, they need to list with us. Any company that's been there knows that there's a lift in terms of your liquidity and demand for your stock if you're captured in some of those indices. By working with S&P, we've been able to create net new sector indices for growing sectors that investors have interest in.
Like more recently, the Battery Metals Index, which we launched with them last year to start to capture those mining companies that have exposure to critical minerals, which, you know, everyone wants to see development in critical minerals now because it's key for energy transition. We're able to build a product with them. Those companies need to be listed with us to be eligible for the index.
How have Nasdaq and Cboe's regional acquisitions reshaped competition in Canada? How do you view Cboe's market position following the MATCHNow and NEO acquisitions?
The interesting thing is both of them came in by acquiring smaller venues that were in Canada. It actually helps to clean up the market a little bit because the venues that they acquired were smaller, less regulated and less sophisticated than us. Having more sophisticated global players in the Canadian market forces the regulators to ensure that everyone actually operates on a level playing field with consistent standards. It's better for the clients, better for the market, and quite frankly, it's better for us because we're competing with peers as opposed to ones that are getting a regulatory leg up.
Now that being said, Nasdaq's been in the market since 2015, came in as an equity trading platform, did not expand beyond that, and has market share generally flat to decline since they came in. Cboe, as I said, came in through MATCHNow, which was primarily a dark liquidity. We chose, instead of investing in that, to build our own dark liquidity capabilities and have grown that to over 30% of the market, actually taking market share away from that incumbent. Similarly, with the move they're making with the NEO platform, again, it's taking a market that was not a tier one market, and it'll actually make it more of a standard the way you would expect it to be operated.
In that basis, I think we're gonna compete with them really well because we have the best liquidity, the deepest set of order types, competitive pricing and the best technology. We're able to compete really well when there's a level playing field that way. Now what that platform does differently is they do offer listing capabilities. If you see from the track record, we win all the major corporate listings that qualify for us. In the ETF world, where Cboe I know is strong in the US as well, we've got 98% of the assets under management of ETFs are listed with us. We've got a number of competitive strengths that really help us sell to the ETF issuers because we have the deepest liquidity.
We're 95%, 96% top of book for all the pricing in the marketplace, the best data distribution for actually getting the reach of those pieces. That's how we market out to the ETF issuers, and that's why we're actually bringing more ETF issuers in every year than exists on all of our competitive platforms put together.
Before we switch gears to trading, can you speak to some of the market structure and regulatory differences in the Canadian market relative to those in the US that investors might be more familiar with?
I'd say probably the biggest difference is no payment for order flow. It is much more of a natural liquidity and price discovery market, and it does make it more difficult for small venues to add liquidity by buying it because we don't have a consolidated tape share model that you can generate revenue from or payment for order flow regime. We do have similar short selling regimes to the US, but you don't have the level of over shorting that you get in the US market that creates more price disruption. Things like happening like when, like GameStop and meme stocks and things like that, we don't see that level of market manipulation.
Given the volatility experienced by markets and increased interest rates, can you speak to how activity within your equities and fixed income business has changed?
I mean, the two biggest changes, the equity business, it's been less that. There's been a definitely step change in terms of retail participation in that business, but I think that's also more around the capabilities that are available for retail traders to engage directly. You do have a long-term shift of declines in mutual funds, growth in ETFs and growth in direct trading for retailers. Definitely pulled back from where it was in the peak of Covid, but at a sustained level that's higher than where it was pre-Covid. In the other components of the business, we've been building out more and more product. The interest rate world, the interest rate futures, we're building much bigger futures curve.
The level of growth that we get in our derivatives business has been, you know, 10%-20% year-over-year in terms of activity, and high single, low double digits in terms of revenue growth because we keep adding more products and more geographical reach to them.
Can you talk about segmentation, I guess within Canada? Are retail investors primarily still trading through the banks or are they now getting self-directed brokerage accounts? How does that evolving?
Every one of the banks offers self-directed as well, and that's probably the biggest service provider to retail is still those accounts through the large bank dealers. You know, the TDs, the Bank of Montreal, the Royals, which are now becoming some of the biggest banks in the US too, as they keep acquiring US assets. There are some other growing presences, the Questrade of the world. We don't have the Robinhood, but there are some similar players to that that are more in terms of that direct investing. That's good for us when we see more of that growth because they also will offer more option trading side by side with equity trading, where some of the more legacy bank dealers are slow to bring that type of product to a retail audience.
That is some of the change that we're seeing that brings more retail to the market.
Within Canada, where is retail in the adoption of derivatives and maybe complex derivatives like futures?
Very early. Yeah, they're not anywhere near as developed as the US market. Having more independent dealers with retail books that provide those products is good for the development of that industry. Like we're seeing good growth in both of our listed options on ETF and single name futures, it's actually been driven by as much institutional as it has been retail.
TMX is currently exploring digital assets. What are the considerations being made before putting digital assets directly onto the exchanges?
The two biggest considerations are, we've largely, well, okay, solutioned it in terms of how to put Bitcoin on exchange, trade it through the existing distribution network and centrally clear it and settle it. The two challenges that we're working on now is the liability regime. You know, can you get the risk management regime right so that if you can't locate the asset, where does that liability sit? That the liability that's different around digital assets doesn't spill over in traditional equities and fixed income that are in our depository, because we run the depository and clearinghouse too. We can solve for that, the custody of it. The second piece, quite frankly, is that the market demand that was there a year ago isn't there today.
The collapse of FTX did two things, which is it actually made the solution we were looking at a whole lot more valuable. People were turning to us because we can create a solution that's using existing infrastructure, it's well-regulated, it's fully risk managed, and it solves all those problems that exist in the crypto market. At the same time, the client demand to offer it to their clients is a bit more hesitant now than it was a year ago.
We're ready with two solutions. We've got a design for cash trading. We also have a design for futures trading on Bitcoin and Ether. For asset managers that are holding those assets in products or ETFs or mutual funds, we could give them a risk management tool. Really it's about client readiness and ready to adopt. It would be the major piece in terms of when we would bring that to market.
Within your derivatives trading business, the firm continues to experience very healthy growth. What products on the Montréal Exchange are experiencing the most utilization?
The most utilization would come from the fixed income futures. Those are global products. They give you both the fixed income risk management tools. For international traders, they can be used as a foreign exchange management tool as well because of that interplay between rates. What we've been doing with those products is, you know, we've always had really strong 10-year product and short-term 30-day product. What we're doing right now is actually building out the curve, adding more liquidity in a 2-year, a 5-year, a 30-year, and actually converting the 30-day product from what was a CDOR based future. CDOR is the equivalent of LIBOR. Like everywhere else, we are moving away from that rate product in Canada to an overnight rate that's a community base rate. We've added a new product in that.
Both those products are having substantial pickup this year as interest rates have normalized. They're really well adopted, that you're going to see very strong growth in that interest rate product curve throughout 2023. We also, and this is different to some of the US markets, we trade both the futures and the options in the same vertical. We have all the equity options, ETF options, single name futures and ETF futures, and they've all been growing 20%, 30% as well.
Does offering all the different types of derivatives in a single channel have complementary benefits for the way institutions are using those in their trading workflows?
I'd say less in the trading workflows and more in the capital efficiency in the clearing side, because it's all centrally cleared in a central book. You get all the capital offsets and the efficiency for the dealers to be in that same book.
Maybe talk to some of the other derivatives products on the exchange and what is the growth appetite there?
We have lots of appetite. The challenge is always ensuring that we're bringing products to market that there's client demand for. What we are not trying to do is bring derivatives products on just because we can and then they don't get traded. I'll give you an example of one that hasn't had the uptick. We thought there was a lot of market demand for ESG-based futures, so we launched ESG tilted index futures on the exchange. There's been very little uptick in it. Because it seems that most people that are ESG-based investing are doing their own analysis in their houses in terms of what they want to invest in, and they are not looking for a third-party product to do it.
It was still based on where we had believed the client demand was. Everything's client-based. If we do a Bitcoin future, it's because we have clients that want the product so they can actually solve a risk management challenge they've got in their own shop.
As you think about like workflow innovations, you've seen some of the US exchanges change the way investors can trade upon their platforms. Is there an opportunity similar to that for TMX?
Only in partnership with the dealers because we're not the front end to the retail trade. So it's working with those banks, with those independent dealers to bring new product, and that's where we work. Where we work more on the innovation side is actually working with some of the product creators. So what you'll find unique in the Canadian market different from the US is probably substantially more innovation around the types of ETFs we can bring to the market, before anywhere else in the world. First market to launch digital asset ETFs, Bitcoin ETFs, futures in the Ether, future ETFs, complex, double up, double down with embedded derivatives. So we've got some unique ETF manufacturers, and as a listed market, we work with them in terms of constructing those products so that they're ready for public market.
Can you walk through Global Solutions, Insights, and Analytics? What makes up that segment, and how do you think about the future growth prospects?
I mean, the simplest way is to divide it into two pieces, which is our Datalinx business, which is the data business coming from all of our exchanges, so TSX Venture, Alpha, Montréal Exchange, and the ancillary corporate information around that. That's a business that historically was more mature growing with with GDP. We've been working to accelerate growth in that franchise. That's also where we're driving growth in our index business, our benchmark business, co-location, for our clients. We're adding more bundled data products. We're doing more international sales. In the last couple of years have been growing that business anywhere 4%-7%.
If you see our new guidance for the company now, you'll see that for the Datalinx business, we're looking to continue to grow that at that mid-single+ rate, in terms of where we can price, where we can add products, where we can bundle and keep adding more analytics solutions, index solutions, new corporate event data, and global sales. I like to say in that business, it's not about we need to hit a home run. We're just gonna keep hitting singles and singles and singles to grow the business faster and create a deeper penetration into the clients in terms of things that they need. That's the Datalinx piece. The other piece is TrayPort, which we touched on in the beginning. TrayPort is our European-based, London-based energy aggregation platform.
What TrayPort does is aggregates basically every major liquidity pool for over-the-counter energy market and exchange-based energy market trading onto a single screen, the way Bloomberg would do for you for fixed income. It's unique. That's the only platform like it in the world. If you're a European energy trader that wants to be able to trade German gas, you need TrayPort to be able to see the whole market. With that business, we acquired it at the end of 2017. We've been growing that double-digit every single year since we've acquired it, and we believe we've got runway to continue to grow at high single-digit, low double-digit going into the future by doing a number of key things. We keep adding products to the platform, so more different energy products for people to trade.
That helps us bring more traders onto the platform, and the traders subscribers have been growing double digits every year since we acquired it. We're adding more enhanced solutions, so premium products on top, algorithmic trading, data analytics, advanced charting, those types of things. Very much like a Bloomberg, you've got your base product, and you can buy premiums on top. We're bringing that same capability in the energy world. The third piece of growth is we're building it out internationally. In some cases, it's just about bringing international products onto the existing platform like we do with Japan and Korea, the JKM, the Japan Korea marker for gas in that region. We actually trade Henry Hub gas pricing in Europe to provide a benchmark price for LNG.
We're also building out in the US market over the last 2 years and starting to add liquidity providers in the US so that we can start to replicate what Trayport has in Europe, in the US, where there's an equivalent size market to build and there isn't an incumbent to displace. It's actually changing the way people behave and how they do business in the past. All those things give us confidence we can keep growing at this high growth rate going forward.
At this point, we can pause for audience questions. Like, please raise your hand and they'll bring you a microphone. While we're organizing the questions, can you spend a moment on pricing power across the platform? TrayPort has CPI built into its multi-year agreements. What about some of the other products on the platform?
Yeah. Just the levels of that, CPI built-in, all of our agreements are multi-year. Our CPI impact for 2023 is going to be 7%-8%, it's going to be a meaningful step-up in pricing in 2023. The other parts of the business, particularly ones that are all part of the regulated, either exchanges or clearinghouse, we have pricing power as long as I believe we are not abusing our market position and we're demonstrating value for the clients and continued investment in the franchise. With that, we've been able to make pricing changes across listings, data, equity trading, futures trading, all within the past year.
What we don't do is go in and say, "You know, we're gonna go 3% across everything." We look at the businesses and look at where do we have opportunities to step up? Where do we compare against our competitors in the market, both in Canada and globally? Where have we invested in the value proposition that we can justify making changes? We've done that within data, we've done it with listings. We made a really interesting change this year with our data business, which was actually to get approval for what we call half CPI. That's not an automatic price increase, but actually it's like a pre-approval for us to come and make changes to the data fees on a regular basis, as long as they're in that range.
What I've been trying to do with the organization is ensure that pricing is something that we look at on a regular basis, as opposed to come out with big bangs every once in a while, 'cause those are a lot harder to execute, they're harder on the clients, they're harder to put through the system. Where if you're regularly looking at your business and your value proposition and making a couple of changes here and there, much more acceptable from the entire industry. That's what we've found through all the regulatory approvals we've had in the last year, is that we haven't had anything we weren't able to execute.
Since we talked about the entire business, and we talked about the different segments, what is your organic growth outlook for each of these segments, and how does that maybe compare to your expense outlook, you know, over the next three years versus longer term?
The organic outlook, and we actually give good new guidance in our, in our material for this, is, you know, we broke it out into, you know, strong growth and market growth theories. The way I would state it is that businesses like Derivatives, like Trayport, like our TSX Trust business, which we didn't talk to, which is part of our capital formation business and is now, you know, that's now a CAD 85 million business it's grown into. All these are businesses that we believe that we can grow high single, low double digit for the foreseeable future. Our market data, Datalinx business, we think we can grow at that mid-plus.
Our broad capital formation business, because of the uniqueness of our two-tier model of venture and senior, and our track record of bringing new companies in and adding new services, we've been growing that at mid-singles and are going to in the future. Then I'd say the more traditional equity trading and clearing that are more mature, that'll grow with the market. As the market grows, it'll grow with it. We're gonna maintain our market share. It's not an area. It's the most competitive area, lowest barriers to entry, so I don't see us, you know, big expansion of market share or market share risk or those types of things. That's kinda how we think about the growth rate.
As a firm, when you put those pieces together and you work through the cycles, because you have to have a long-term outlook on this, because there's a piece of the business that's still transactional, which will move up and down in quarters. Over that long term, you can grow the business above mid-single digits and manage our cost base at the same time to what we guide to is what we'll call flat to inflation. We're largely a fixed cost-based business. There's very little variable costs as we grow this. We made a lot of investments to ensure the business is scalable, and so that each dollar of revenue doesn't have a lot of incremental cost to it. Our biggest costs are our talent base, which is almost two-thirds of our cost base.
We face the same cost pressures that everyone else does. I'd guide you to 3.5%-4% is what we're seeing for our own organization globally. Again, we're gonna manage that below inflation. So the outlook to that is, over the long term, we should be able to grow our bottom line double-digit and get that scale leverage benefit of being able to grow revenues faster than the expense base.
Maybe just coming back to the TSX Trust business you just mentioned.
Mm.
Explain what that is and, you know, why you're excited about that business.
The TSX Trust is, it's transfer agency and trustee services, primarily to our public companies, but also to private companies that aren't public yet. You know, if you think about who we compete with in the world, Computershare is the bigger competitor in Canada. We're the number two that's chipping away at them. When we first got into the trust business, really a decade ago, we were a very small player, 13% of the market. We're now in the mid-thirties in terms of market share. We made an acquisition along the way of AST Canada to bolster our capabilities and add more blue chip clients to it. We can take advantage of the relationship we have with issuers before they go public to help them understand how we can help them in all the different services they need.
When it comes to winning new business, even though we're 30-ish% of the market, we're winning more than 50% of the new business. We've got the majority of the ETFs on our platform as well. It's a, it's a mixture in that revenue base of recurring revenues, because it's an annual recurring relationship with those clients. There's transactional pieces as well, because we work for them on the trustee, mandates for corporate actions, events, you know, debt issuance, those types of activities. Again, trying to meet all the needs of a capital raiser with an expanded set of services.
The piece that's become more interesting over the last year is, as we've had bigger names and we're handling their cash for them as part of their transactions, we have a net interest income opportunity that we didn't have really in a material way two years ago. We guide folks that, you know, every quarter point of interest rate growth, as our interest rates grow over time, is worth approximately CAD 2 million-CAD 2.5 million of annual run rate revenue because of that net interest income spread that we get in our client relationships. It's hard to give it to you more specific than that because each relationship is different with a client, and what amount of cash that we're holding and over what duration really depends on what we're holding it for.
Is it a dividend? Is it a corporate event? Is it an M&A activity? Those all drive the mix. The more we see more M&A activity, more corporate action events, the more that cash base will grow and the more net interest income revenue that we'll grow in. This is a business that, with that piece, the depth of capabilities we have, the client mix we have, that we really believe we can continue to grow this at double digit, and we can take share away from an incumbent like Computershare with the simple objective our team has, is that we will be number one in this market. We will grow our way in through acquisition of clients to be the number one player in the market.
Yeah. With that, I think this is a good place to pause. John, thanks again for joining us.
It's a pleasure. Thank you.