The price-cutting war between Canadian exchanges ratcheted up another notch, and Alpha's latest investor-friendly run at the Toronto Stock Exchange spells trouble for parent TMX Group.
Alpha announced plans this weeks to cut trading fees on penny stocks - securities worth less than $1 - effective Feb. 1. This is a move targeted at the high-frequency trading crowd, and RBC Dominion Securities said in a research note on Friday: "Effectively, Alpha will have lower active fees and pay higher rebates for low-value securities compared to TMX."
The move is expected to cut earnings per share at the TMX Group by 2 per cent in 2101, according to RBC Dominion, with a worst-case scenario that EPS falls by something in the 5 to 8 per cent range. (Let's quickly acknowledge the conflict of interest here: RBC Dominion is one of several investment dealers that founded and co-own Alpha.)
A year after launch, Alpha has surpassed expectations, claiming 27-per-cent market share in stock trading during one session in late December. The upstart trading network targeted a 20-per-cent share of trading within 12 months of its debut.
While Alpha and other alternative trading systems have put all sorts of pressure on the incumbent exchange, the TMX Group does benefit from one aspect of competition: The overall volume of stock trading is soaring, as an increasing number of high frequency players ramp up Canadian operations. RBC Dominion noted Friday that trading volume was up 23 per cent in 2009, compared to the previous year.
However, when traffic levels off, or slows, it will quickly become apparent that the TMX's profit margins on stock trading aren't what they used to be.