Hi, everyone. Thanks for being here. My name is Aravinda Galappatthige. I am one of the TMT analysts here at Canaccord Genuity. Very pleased to have, for the second year in a row, the TMX Group, and with me is David Arnold, the Chief Financial Officer of the company. TMX obviously needs no introduction, but they operate global markets, and clearing houses in Canada, the TSX, and the TSX Venture Exchange, as well as the Montréal Exchange, on the derivative side. Here in the U.S., the Boston Options Exchange, and more to come on that, as we will discuss during this conversation. Their Global Insights business, which includes a myriad of analytics and insights businesses in the capital market space, represents almost a half, at this point, of the profitability of the firm. A lot to discuss. David, thanks for being here again.
My pleasure.
Typically we would leave the M&A questions a little later, but you have been busy, so let us kick it off with that. You have been active ever since the milestone acquisition of VettaFi. You have been making tuck-in acquisitions. Of late, the size has been ticking up, Cboe, RAFI, and then most recently, the MEMX deal. How would you characterize your M&A playbook at this point? Has it really changed much in the last four or five years?
No, it is a great question, Aravinda. Firstly, thank you for having us back at the Growth Conference. I think it is your 45th year.
46th.
Yeah, 46th. Geez, impressive. This is an interesting question because our M&A playbook really hasn't changed. This is all anchored in our growth strategy of the enterprise. We have some transformational objectives we've set out, which is to really have more recurring revenue than transactional revenue, more revenue outside of Canada than inside of Canada, and as you touched on, our Global Insights business having at least half of our revenue coming from that segment. We've really tried to accelerate our strategy using three techniques. The first is really organic growth. It's one of our superpowers. We are really good at building technology, running great markets and infrastructure, as well as the full ecosystem. Then there's also the ability for us to partner with individuals. Obviously the third lever is to accelerate it through M&A. That M&A playbook hasn't changed.
What's very important to us is being disciplined. Price discovery and fit with the culture of the organization is very important. It's interesting, you just rattled off three announcements in the second quarter. Those obviously had very different tenures behind them, right? Sure, we were busy getting to announcement, but they will close on different schedules, and they're in different parts of the business.
Exactly. Maybe just we'll take the bigger one and the most recent one, MEMX and BOX.
Yeah.
Maybe just walk us through that transaction a little bit for those in the audience that may not be familiar with it. The central question is, you always talked about being positioned more strongly to U.S. You always had the controlling ownership of the Boston Options Exchange. When you look at the portfolio now, you're going to have, I think, three options exchanges here, and an equities exchange. You obviously have the ATS, which you built up organically. Then obviously, VettaFi. How do you put all that together? How does all of that potentially fit into a broader U.S. strategy?
Look, we were clear at our investor day and prior that we have a North American expansion strategy. You just got to call it like it is. The U.S. is the most liquid, most competitive market in the world. For us, competing with the U.S. marketplace is very important to our success in Canada. Similarly, it's important to our long-term success to have a presence in the rest of North America, principally the U.S. So it fits really squarely in there. The Boston Options Exchange was seeded originally through our Montréal Exchange as part of that legacy in the business. We've always had an opportunity to evaluate, can we do more?
Many folks, yourself included, have asked us over the years, "What more can you do in the options space?" So this creates a scaled U.S. equities option venue. The management team at both of those businesses are very strong. The management team at MEMX is going to be in a primary driving seat with Jonathan Kellner leading the enterprise. So we're excited because it answers a question now. What more can you do? As we get into the various put call options in the future, we have our U.S. ATS, we've got to figure out, do we vend that in? Don't we? So there's lots of options for us. But job one is go through the competition and regulatory filings with the SEC, and then obviously, integrating those two businesses.
Okay. You're looking to close this early 2027?
Yeah. We don't know how long the SEC process will take. We've used some of the benchmarks, which is somewhere in that kind of one-year window.
Okay.
Yeah.
Makes sense. Let me switch over to the ETF market. I attended your exchange conference, which was very interesting. You have an appreciation for how much ETFs have grown. Ever since you acquired VettaFi, you have been essentially nourishing it with these tuck-ins, whether it is geographically going into EMEA, whether it is strengthening the teams with indices, fixed income, nuclear indices, and so forth. Despite maybe some concerns, you probably had one of the best quarters for VettaFi, 26%, 27% organic growth.
Absolutely.
What is the outlook for that business? What does VettaFi look like now, fully armored with all of this?
Yeah. It is interesting, Aravinda. When we first acquired VettaFi, one of the things we did look at is we need to diversify that business into other asset classes. Right? You touched on them. Trayport was one. We obviously did the work on the fixed income side with the Credit Suisse UBS indices that we took over. Really for us, it has been, let us continue to diversify the business. What RAFI does for us is it exposes us to a whole different approach to weightings within an index or an ETF at the end of the day, which is using fundamental research that Robert Arnott and his team at RAFI have done an incredible job in creating a really, really good business. That, once again, then diversifies it all. At the end, yes, the top line is very impressive of recent quarters.
I have got to anchor everyone back to our long-term guidance, which is really high singles to double digits growth, because I am not looking to print 26% or 20%+ every single quarter. We have got a much longer kind of horizon for growth in that business. The long-term guidance of high singles to double digits is a great value proposition for us.
Could we sort of view what you have been doing and what you did with RAFI as well as not just about growth, but sort of moating this industry?
Yeah.
This business so that it can deal with the changes that would naturally come?
Absolutely. The strength in the business, by having a more diversified client base and going across multiple asset classes and different parts of the cash equities kind of spectrum, it creates a stronger franchise and creates some critical mass. And yeah, you can look at it as a moat. We consider it to be more defensible through-
Yeah.
Market cyclicities.
Okay, makes sense. You've recently closed Cboe, the Australian component of your Cboe acquisition. Can you sort of help us understand the opportunity in Australia? Because I think your starting position alone is close to 20% in terms of market share. Obviously, very close parallels between the way Canada operates as well. What's sort of the broad opportunity in Australia?
It's a great question, Aravinda. The first thing that we've done is we've obviously announced the closing. We've rebranded. It's now TMX Australia Exchange. It really does provide a significant opportunity for us. This is a very, very interesting one where we did some business development work back in 2022. We went to Australia, a number of us from the senior management team, and we really liked what we saw. We saw a great opportunity. Cboe had recently moved into the Australian marketplace, so we were like, we could probably organically build a third competitor in that marketplace. We'll put it on the back burner because we've got a lot of other work to do. We had VettaFi in the works and stuff like that.
When Cboe announced that they wanted to divest of Australia and Canada, and specifically Australia, we saw it as an opportunity to accelerate that. Once again, the M&A opportunity was an acceleration of an intended strategy, which was to go into Australia. We already had business development resource on the ground in Australia, helping with mining and associated kind of natural resource businesses that naturally had an affinity with listing on the Toronto Stock Exchange or the Venture Exchange. The outlook over there is good. I think that first job is migrate off of the legacy technology as part of our transition services agreement, build the like for like functionality, and then look to bring some of the TMX DNA to Australia. Dare I say it could be a really, really good proving ground for a Venture Exchange equivalent down there.
I see.
There could be great opportunities for dual listings for a lot of individuals. List on the TMX Australia Exchange, but then also list on the Toronto Stock Exchange or the Venture Exchange here. I am excited for what this brings. We pretty much took on the entire team from the Australian business. We are hitting the ground running. When we talk to our clients in Australia, they are very excited that we have decided to invest in the business.
You talked about rebranding it. Stylistically, are there significant changes to be made in terms of how you would run that, or is it more on the-
No, I think that the team in Australia are very strong.
Okay.
Emma leads an incredibly strong, seasoned team of professionals. They're going to do their thing, and we're going to help fuel that by supporting them, investing in them, and bringing some additional capabilities to the Australian marketplace.
Okay. Maybe a topic that's been quite relevant over the last, I guess, three months and maybe even a bit before that, but still worth discussing because it does affect your stock price.
Yeah.
Global Insights is half of your business. How do you view what's been going on with software? The valuations of July was not bad. Things came back, but considering the starting point, we're still off a fair bit. Do you sort of look at this and say, "I still have a good balance sheet. I could maybe, things, assets that would've been less attractive then are more attractive now"? Or are you sort of maybe taking a step back and sort of trying to adjust to the macro?
Yeah, I think you're hinting on without saying it, AI.
Yeah.
Let's unpack a little bit of it quickly, Aravinda. The first part for me is we see AI as more of an opportunity than a threat in the company. We're already actively using artificial intelligence through various different large language models in our software development teams. But remember, we don't develop software to sell to others. We develop software to run our infrastructure and our marketplaces. In some cases, we even buy in software from others where we've decided it's not core for us to actually do that. Our software development teams are actively using Copilot, GitHub, and other large language model AI tools to be more productive in their coding. That's really, really positive.
Obviously, on the M&A front, one of the things that we do is we have a number of filters, as you would expect us to, and we would look at strategic alignment, cultural fit, we'd look at valuation. But one of the other filters we've done is really, can this business that we're maybe interested in acquiring to help accelerate our strategy, does it have a competitive advantage or a weakness to AI? Could it be under threat? That's an important part of our filter. So we've walked away from a few things that we've looked at that we felt that business is probably going to be disrupted. Other parts of our franchise, we feel that the moats are, it's proprietary data.
We today, in some of our data offerings, take non-proprietary data that we use artificial intelligence to scrape, but we actually merge it with proprietary data to derive the insight that our clients actually subscribe to. So that's our take on it. Because we're not a software manufacturer per se, it's less of a disruptor for us than anything else.
Maybe just a quick follow-up to the point about proprietary data, especially when you think about the VettaFi, RAFI side of the business. Is there an argument to be made that the proprietary data in and of itself can be recreated?
It's interesting. Yes, but to a small degree. When you deal with the TMX Datalinx business, as an example, the vast majority of that data that is valuable is effectively the professional subscriber data feeds and the APIs and such. The trading houses and brokers and dealers that subscribe to those professional services, they want depth of order book. They want a whole host of data that we do charge for. We used to move from pre-APIs and algorithmic trading. It was a simple billing model. As the technology kind of changed and our clients wanted to consume that pro data in different ways, so did our billing structures change and so on. But you still pay for that quality data.
The less valuable delayed quote data, where you're not getting all of the insights and the intel in terms of depth of order book and so forth, we pretty much do give most of that away for free. That is not something that would be disrupted because there's really no revenue associated with it. The vast majority is on the professional side. Yes, when you go to VettaFi, the same applies. People are subscribing to our services and/or we're supporting their index and their benchmark. You can use AI to mimic our calculation engines, but it's so much more than that. When you look at RAFI, it's based on fundamental research. It's not using just market cap weightings to come up with an index. So we consider it to be quite defensible.
Often when I'm talking to the team in New York on our Index Factory team, they're like, "It is so much more than a calculator, David. You need to realize that." I've spent a lot of time looking at what they put in to actually derive the indices, and there's a lot more human capital intel than necessarily would be meeting the eye.
Okay. Maybe just on a similar theme, let's just move to Trayport.
Yeah.
In my mind, one of the most successful acquisitions you've done, if you think about that period of time. How do you think about the outlook for Trayport? I know you got a lot of questions in the recent couple of conference calls, but I know there's more to come in terms of geographic expansion and new products. Maybe also just touch on, to the point about your defensive credentials against AI, like that network effect. That's another factor.
Correct.
Trayport is a sort of a good case in point there. Maybe I'll just let you?
No, you know what? You've almost answered the question. You know us so well, Aravinda. The ability to replicate the Trayport screen using AI tools to create the technology is doable.
Yeah.
Without the network effect, as you said, which is connecting brokers and traders and then exchanges and getting everyone onto a platform, you would literally have a piece of software with a blank screen. The secret sauce really for Trayport is the strength of the network. We spend a lot of time looking at the network strength, and it's never been stronger. It is really, really robust. In more recent quarters, we've had some of our renewals that have come up that are a lower growth rate businesses. For example, if you've got a very mature subscriber coming up for renewal, chances are they're only going to uplift by maybe 4 percentage points, 5 percentage points, 6 percentage points. This year, our cost of living adjustment was only 3%. It's one of the lowest in recent times. That's kind of what you see factoring in through the numbers.
When we look at the pipeline for 2027 and 2028's renewals, there are more clients in there that are in more of a growth phase, and we expect them to renew at higher rates, i.e., more subscribers and therefore a higher bill.
Okay. I would be remiss if I didn't touch on the derivative side of the business. I picked up coverage I think 2.5 years ago, and there's never been a segment where I'm always low on, and I'm revising upwards.
I am internally, too.
Yeah. I think if on top of my head, I think 20%+ in 2024, 32% growth in 2025, all organic and double digits in probably the middle teens this year. There's clearly a structural aspect as well as a cyclical aspect. Maybe just sort of give us the high level view on that?
It's a great question, Aravinda. The way I look at it, and people internally know I use a lot of analogies and metaphors, and here is a really good one. If you've got a sailboat, you've got to have the sails, so that when the winds come, you can capture it and you can go at speed. I give Luc Fortin and the entire team based out of Montréal a ton of credit. They have built out the interest rate curve over the last number of years. We have multiple products all along the yield curve. They've added various different option and future products. We've seen in the last four, five, six quarters, incredible momentum in the derivative complex.
If we had not done the work that we did to create all of the product, we wouldn't have, using my analogy, the big sale to capture that momentum. You're seeing that right now. I said at our one analyst call, long may this continue. At some point, the wind's going to die down a little bit more, and there'll maybe be less volatility and therefore a little bit less action. It's still a high-growth business. Like we've always said, through the cycle long term, high singles to double digits. Right now it's outperforming on those measures.
Okay. Great. Maybe just jumping across to a couple of more recent thematic topics. You know better than me, so end of Q2, we saw a notable sell-off in the space, and particularly in the U.S. names, I think triggered by the CFTC decision around the approvals given to Kalshi and Coinbase. Maybe talk about what your view is when it comes to perpp-
The perpetual.
Perpetual futures. Yes. I know it's early stages.
Yeah.
Is there anything that you have as a company?
Look, I'll speak to Canada.
Yeah.
We are very focused on listening to our clients and our clients' interest, desire, and demand for product. The phone is not ringing off the hook for, "When can you launch perpetual futures?" We are capable of doing it, and we have work to do that within our marketplace, because it's something that we see happening south of the border, and we want to be able to be ready and willing when demand flows. We're just not seeing it right now. Once again, everything goes back to a client-driven product roadmap, if you will. But yeah, to the extent the demand arises, we're ready to launch.
Okay.
Yeah.
On the prediction markets, very quickly, opportunity, threat?
That's a little bit more of a U.S.-centric discussion. We don't see a lot of that in Canada, but we operate in the U.S. and now with MEMX and BOX hopefully coming together after regulatory approval. You might have seen this morning, MEMX put out an announcement that they are going to be able to facilitate a predictive market instrument on their environment. So that's obviously got to go through the right kind of approval process, but that is something that we need to do because we have a presence in the U.S., and we need to be responsive to those needs. But in Canada, it's really not the case. The retail demand is not really there. The institutional is not at all. We don't have any of our institutional clients demanding that.
If that changes, much like the perpetual futures, it's something that we can offer. The problem is those would really be zero-day options or binary that we need to then probably work with the regulator locally to figure out how to make those available, because right now the current rule construct wouldn't allow those instruments. No.
Okay. It is interesting. It seems to me, from the quick read that I had, you are looking at creating binary futures based on particular public equities-related events.
Earnings miss, revenue, EPS, and then maybe certain events.
Yeah.
There is probably a case for it.
Yeah, there is a case for it, and the question will be, are the consumers of those products retail investors that are leveraging, or is it an institutional hedging instrument? I hear the great story of the one guy, has an ice cream shop, and he is going to offer free ice cream if it goes above a certain thing. So he goes and he does a prediction market bet to offset that. That is a great hedging strategy. That would make sense. I am not so sure this is going to be as prolific in the Canadian marketplace, but time will tell.
Yeah. Okay. We'll see. I'll just open it up to the room if there's any questions. We've got a couple of minutes. Go ahead, David.
Are you looking to enter into India?
That's interesting. Nothing imminent. We are looking at all marketplaces. No, nothing imminent in India for us. Sorry, you had a question.
Yeah, sorry, very specific. On TMX Datalinx in terms of co-location and the whole piece, is that a growth market for you now that you've launched recently the TMX Elastic Market Access? How are you thinking on that?
Yeah, that's a great question. That ties a little bit to AI and now the chip war and so on and so forth. The demand for next-generation co-location hardware technology that, dare I say, will consume way more power than the existing architecture is real. Our team are working on that. We actually have client demand for those types of co-location services. Those will be very much the premium offering in that space, until such time as that really becomes ubiquitous and it's the only real offering. I would expect in the next zero to five years, just more and more to take hold. Once again, like everything else, that's being driven by a client demand.
Clients saying, "We would like to put next-generation hardware with AI enabled on the silicon, into the matching engine room so we can actually high frequency or algo trade very close to your matching engine." We're responding to that. It's a tough project. Someone asked me about it the other day, and you got to deal with the local municipalities, you got to deal with power. You can't just fire up those machines in the existing infrastructure without dealing with infrastructure upgrades.
Okay. Well, I think we're at time.
We're at time.
I'm going to give you seven seconds to answer one question. Thank you, David.
Thanks, Aravinda. Appreciate it. Thank you.