globeinvestor.com

News from The Globe and Mail

BOYD ERMAN

Thursday, May 15, 2008

Alpha, the stock-trading system that Canada's big banks are launching this fall, is taking the battle with TSX Group Inc. to a second front in hopes of breaking the incumbent exchange's profitable lock on market-data sales.

For Alpha's backers, which include Toronto-Dominion Bank and Royal Bank of Canada, the next step - beyond challenging TSX in the traditional business of trading - is to take some of the lustre off what they view as the crown jewel of the TSX.

While many investors focus on the more dramatic commerce of buying and selling stocks, where price competition between TSX and upstart trading systems is eroding earnings, the data arm of TSX quietly churns out growing profits by reselling the numbers generated by trading to 164,000 subscribers.

The data charges have particularly rankled the banks that back Alpha, as well as many big traders, which view the trading data as theirs in the first place because it's generated by the buying and selling they do.

Alpha wants a piece of that business, and to crack the market it plans to give away its market data after the system opens in September.

Once Alpha is processing 20 per cent of Canadian stock trading, something chief executive officer Jos Schmitt said should take less than a year, the company will start charging for the data, but there will be a "substantial cost differential" compared with TSX's price. "There is a lot of data that is produced by the industry and a model like Alpha makes sure that the industry can benefit from it, and it's not just benefiting a limited number of owners and shareholders of a purely for-profit organization," Mr. Schmitt said.

It's important for TSX to fight off the challenge. Market data sales account for about a quarter of TSX's revenue, and rose 9 per cent in the last quarter. That helped the company increase profits even though revenue from trading fees fell because of price cuts aimed at combatting competition from upstarts like Alpha.

"At the end of the day, market data is going to be how these guys are going to be making money," said Jeff Fenwick, an analyst who covers TSX Group for Cormark Securities. "That is one reason why I think TSX is willing to cut fees on trading, to maintain the flow of market data."

Trading fees accounted for about a third of TSX's revenue last year, but that will likely fall to about 20 per cent by 2009 as the focus shifts to areas such as data, said Mr. Fenwick.

The question is whether Alpha can generate enough trading volume to make its data worth buying, he said.

TSX also has an advantage because of the reams of historical data it has. Those numbers on past transactions are important for big traders to analyze how stocks behave and build better trading systems and algorithms that can automate buying and selling.

"It's the information content within the order book that matters," said Tom Kalafatis, vice-president of sales and product development at TSX. "That information is how many people are trading the stock, who's trading it, at what time, at what price, in what size. We believe we add that value and the challenge will be to continue to add that value."

TSX Group (X)

Close: $45.86, down 34 cents

© The Globe and Mail