Traders signal offers in the S&P options trading pit at the Cboe Global Markets exchange in Chicago in March.Scott Olson/Getty Images
J. Ari Pandes is an associate professor of finance and an associate dean at the University of Calgary’s Haskayne School of Business.
Starting in 2020, Cboe Global Markets made a bet on Canada.
The Chicago-based exchange giant spent hundreds of millions of dollars to acquire two Canadian trading platforms – MATCHNow in 2020 and the NEO Exchange the following year – and set about building a real alternative to the Toronto Stock Exchange’s grip on Canadian capital markets.
It promised more competition, lower costs, and real choice for issuers and investors.
But five years down the road, this past April, Cboe quietly admitted the bet did not work.
It agreed to sell its Canadian business to TMX Group, the parent of the very TSX it had come to challenge. To add insult to injury, Cboe is selling at a price that does not even appear to cover what it originally spent.
Several years of effort, hundreds of millions of dollars, a net loss on exit. Regulators who approved Cboe’s arrival specifically to foster competition are now being asked to approve the incumbent absorbing that competitor.
Welcome to Canada, where competition comes to die.
TMX deal to buy Cboe exchanges in Canada and Australia raises questions about competition
TMX says the deal will reduce cost and complexity for Canadian market participants. But fewer competing venues typically means less price pressure, less innovation, and less urgency to serve smaller companies and investors who finance them.
We have seen this play out before. When TMX absorbed Alpha, an earlier exchange challenger, competitive pressures faded over time. Meanwhile, the shrinking public markets we keep talking about – well, they are likely to get a whole lot smaller.
None of this should come as a surprise. Exchanges are simply the latest sector to illustrate a recurring structural Canadian problem.
In banking, the Big Six firmly remain the Big Six. New entrants face a licensing process so forbidding that even the Office of the Superintendent of Financial Institutions recently told a Senate committee that it needs to revamp its own basic risk appetite to allow more competition.
In telecommunications, groceries and airlines, foreign and domestic challengers alike have spent years discovering that the deck is stacked.
Sector after sector, the story is the same. High barriers to entry and a regulatory culture far more comfortable protecting the status quo than disrupting it.
And incumbents have figured out the game; their most effective competitive strategy is simply to wait. Wait long enough, and the challenger will exhaust its capital and exit. Or better yet, sell to you at a discount.
Canada is in the midst of an urgent debate about productivity and economic sovereignty, as rising geopolitical tensions, trade frictions and a more fragmented global economy reshape the environment in which Canadian companies compete.
The Cboe sale provides yet another stark data point, and it should sting, because Canada needs foreign capital and companies to want to list, trade and grow here.
Exchange concentration is not an isolated issue. It shapes access to financing across the economy, particularly for smaller and mid-sized companies that depend on competitive alternatives to raise capital on reasonable terms.
The federal government recognizes the issue in principle. Last year’s federal budget pointed to insufficient competition as a driver of high prices across sectors. The Competition Bureau has documented similar concerns for years. But inertia lives on.
Cboe’s experience should act as another wake-up call.
A well-capitalized, sophisticated market operator effectively concluded that competing in Canada was not worth the cost.
Not because its product was inferior or its execution poor. Rather, because the economics of dislodging a deeply entrenched incumbent, in a relatively small market where regulators are more comfortable with consolidation than disruption, are unforgiving.
That is the message the sale sends to every future challenger considering a similar bet on this country.
Canada keeps saying that it wants more competition. The Cboe exit is a prime example of what happens to those who take those words at face value.