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OVERVIEW OF THE BUSINESS (continued)
Trading – TSX Markets and NGX
TSX Markets
Our trading operations for both Toronto Stock Exchange and TSX Venture Exchange are conducted by TSX Markets. Participating Organizations and Member Firms (collectively “POs”), acting as principals or agents for retail and institutional investors, place orders to buy or sell listed securities using our fully electronic trading systems.
- In 2005, trading and related fees paid by POs relating to both exchanges represented $108.7 million, or 37% of our revenue. Trading and related revenue was $92.4 million on Toronto Stock Exchange and $16.3 million on TSX Venture Exchange.
- In 2004, trading and related fees paid by POs relating to both exchanges represented $88.8 million, or 37% of our revenue. Trading and related revenue was $76.1 million on Toronto Stock Exchange and $12.7 million on TSX Venture Exchange.
Trading occurs through continuous electronic auction markets or through crosses in which POs internally match orders and report them through the exchanges. All trades are settled through The Canadian Depository for Securities Limited (“CDS”), in which we have an approximate 18% interest, with the balance being held by the major Canadian chartered banks and by the Investment Dealers Association of Canada (“IDA”).
For trades of securities listed on Toronto Stock Exchange, other than certain interlisted securities described below under Toronto Stock Exchange - Interlisted trading and pricing changes, POs pay fees to TSX Markets based on the value of each trade up to a fixed cap per trade. Fees are charged to the PO which enters an order that is matched against an existing order. TSX Markets offers discounts to POs that achieve certain minimum total monthly trading value on Toronto Stock Exchange to further encourage trading on that exchange. In addition to offering discounts based on monthly trading value, TSX Markets offers alternative discounts to POs based on achieving a minimum number of trades for a month.
For trades of securities listed on TSX Venture Exchange, POs pay a percentage fee based on a combination of the value and volume of each trade, subject to minimum and maximum fee levels.
Toronto Stock Exchange - Interlisted trading and pricing changes
Trading activity is affected when listed issuers seek additional listings on foreign exchanges, principally in the United States (often referred to as interlisting or dual listings). Interlistings generally raise the profile of issuers in the global market, and trading volumes for these issuers’ securities often increase across all markets as well as on Toronto Stock Exchange. Whether a significant portion of trading of a particular issuer remains in Canada following its interlisting depends on a number of factors, including the location of the issuer’s shareholder base and the location of research analysts who cover the issuer.
Toronto Stock Exchange’s share of trading in Canadian Based Interlisted issues (CBIs), based on value traded, increased from $533.0 billion in 2004 to $640.1 billion in 2005. Our share of trading in these interlisted stocks increased from 47% in 2004 to 49% in 2005.
TSX Markets has a dedicated sales team focused on U.S. accounts with the goal of raising the level of awareness regarding the benefits of trading on Toronto Stock Exchange and TSX Venture Exchange.
On October 1, 2005, we introduced, on a one year trial basis, a volume based trading fee structure on issues that are interlisted on Toronto Stock Exchange and either NASDAQ or AMEX. The volume based fee structure better aligns our trading fees with the prevailing model in U.S. marketplaces, with the goal of capturing more interlisted trading volume. The new fee structure affected approximately 139 issues at December 31, 2005 and replaced the value based fee model for these issues. When liquidity is added to the central limit order book, each booked and subsequently executed passive order receives a credit of $0.00275 per share to a maximum of $50. When liquidity is removed from the central limit order book, each executed active order is charged $0.004 per share to a maximum of $100. Trades under this new fee model are not eligible for existing discounts based on value or number of transactions, except with reference to the cross printing facility (qualification and credits for participation in this facility remain unchanged).
Trading fees for all other issues listed on Toronto Stock Exchange remain under the current value based fee system. Fee reductions for trading these issues were implemented in two phases: as of October 1, 2005, the charge of 1/50th of 1% on the value of executed active orders was reduced to 1/55th of 1%, and on January 1, 2006, a further reduction to 1/60th of 1% took place. The maximum fee per trade continues to be $50.
We anticipate that these changes to the trading fee structure should result in increased trading volumes and improve our competitive position. It is possible that the decrease in trading fees could reduce trading and related revenue by about eight to ten percent on an annual basis if offsetting benefits are not realized. However, lower transaction costs tend to augment liquidity by increasing the attractiveness of Toronto Stock Exchange as a trading venue3.
Trading Technology
In 1997, Toronto Stock Exchange was the first major exchange in North America (and one of the first globally) to move to a fully automated exchange where trading takes place entirely through electronic systems, thereby increasing the speed of execution, accessibility to the exchange and the number of transactions that can be processed. In May 2001, our original electronic trading systems were replaced with a more reliable, flexible and scalable system. The system hardware was upgraded in 2004. Two hardware upgrades and two software performance releases were implemented in 2005 in response to increases in order message volumes and transactions being generated within the marketplace.
We have a business continuity plan designed to provide the means for us to continue to operate in the event of a disruption to our main facility. As part of this plan, we operate two data centres in separate locations, allowing for back-up recovery in the event that one of the centres experiences a failure.
3 The “Toronto Stock Exchange - Interlisted trading and pricing changes” section above contains certain forward-looking statements. Please refer to “Forward-looking Statements, Risks and Uncertainties” for a discussion of risks and uncertainties related to such statements.
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