Direct Edge Holdings LLC, the operator of U.S. equity exchanges based in Jersey City, New Jersey, is a candidate to become the first American equity market controlled by a foreign company.
TMX Group Inc. (X), parent of the Toronto Stock Exchange, is in talks to acquire Direct Edge, the Wall Street Journal reported yesterday, citing people familiar with the matter. Jim Gorman, a Direct Edge spokesman, and TMX spokeswoman Carolyn Quick declined to comment. TMX’s own takeover by a group of Canadian banks and pension funds received regulatory clearance yesterday.
The last attempt by an overseas buyer to control a U.S. share exchange ended in February when European antitrust officials blocked Deutsche Boerse AG (DB1) from buying NYSE Euronext. (NYX:US) Direct Edge is 31.5 percent-owned by Deutsche Boerse, with smaller stakes held by Citadel LLC, Knight Capital Group Inc. (KCG:US) and Goldman Sachs Group Inc. (GS:US) Its equities exchanges accounted for 9.5 percent of U.S. stock volume last month, its data show.
“The TMX management have eyed the U.S. equity markets for quite some time,” Richard Repetto, an analyst at Sandler O’Neill & Partners LP in New York, said in an e-mailed statement. “The purchase of Direct Edge would provide them with that opportunity and entrance into the U.S.”
Chief Executive Officer Thomas Kloet said in a phone interview in March that the Toronto Stock Exchange owner has “international aspirations” and may seek stakes in other market operators or an acquisition. TMX bought 16 percent of the Bermuda Stock Exchange last year.
“We continue to look at acquisitions of all types,” Kloet said. The company “wouldn’t rule out an acquisition of a major exchange around the world,” he added.
Kloet said in an interview on June 25 in London that TMX was open to starting its own U.S. bourse to attract listings from small and medium-sized companies. The exchange would probably focus on raw-material companies, he said. The Jumpstart Our Business Startups Act, or JOBS Act that President Barack Obama signed into law in April, aims to make it easier for smaller U.S. firms to become publicly traded.
The Canadian company already has 180 listings from U.S. businesses on its markets. Canadian stocks account for 3.84 percent of global market value, more than those in France or Germany, according to data compiled by Bloomberg.
“They’d be going after micro to small-cap businesses, something they’ve shown they’re good at with their own venture market in Canada,” Doug Clark, managing director of liquidity research at ITG Canada, a subsidiary of New York-based Investment Technology Group Inc., said in a phone interview. “These would be companies that don’t meet the New York Stock Exchange or Nasdaq listing requirements. I don’t think they’d want to go after bigger companies and wake the sleeping giants who might come to Toronto and compete with them.”
A Direct Edge acquisition would probably not significantly affect TMX earnings, Clark said.
The company’s first-quarter profit fell 10 percent as trading slowed and listing fees dropped. Equity volume fell 28 percent during the period. Listings fees decreased 21 percent, led by a drop in the number and value of new listings on the Toronto Stock Exchange. TMX owns a majority stake in the Boston- based BOX Options Exchange LLC, which represented 4.2 percent of U.S. equity derivatives last month, according to data compiled by Chicago-based OCC.
Maple Group Acquisition Corp., whose dozen members include Toronto-Dominion Bank, Canada Pension Plan Investment Board and Manulife Financial Corp., received approvals yesterday from the British Columbia Securities Commission and the Alberta Securities Commission for final rules that allow it to acquire TMX and operate a combined exchange and clearing company.
Speculation over a Direct Edge sale dates to December when the U.S. Justice Department made the divestiture of Deutsche Boerse’s stake, held through its International Securities Exchange unit, a condition of its merger with NYSE Euronext. European regulators blocked the trans-Atlantic union two months later and the Frankfurt-based exchange never sold.
In January, William O’Brien, Direct Edge’s chief executive officer, said the company was exploring “capital market alternatives.” The company hired Wells Fargo & Co. and Bank of America Corp., the Wall Street Journal reported at that time, citing unidentified people. O’Brien couldn’t be reached after the Journal story was published yesterday.
“Like all of our other peers, it’s only logical for us to be looking at capital market alternatives all the time,” O’Brien said in a Jan. 28 telephone interview. “As the environment changes, that impacts how you look at them.”
Direct Edge, which trades only U.S. equities, was formed in 2005 when Knight bought the trading platform from Domestic Securities Inc. O’Brien, the former chief operating officer of BRUT LLC, a venue Nasdaq acquired in 2004, joined the company in July 2007 after three years at the New York-based company. Knight spun off Direct Edge in 2007. The exchange company plans to start a market to trade equities in Brazil.
Maple Group is creating an exchange operator that would control more than 85 percent of Canada’s equities trading, the Montreal Exchange derivatives bourse and the country’s main securities clearing house. The company would combine the Toronto Stock Exchange, TSX Venture Exchange and Alpha Exchange.
TMX had an agreement last year to combine with London Stock Exchange Plc. It failed to get shareholder support and the deal was scrapped in June 2011. By October, TMX agreed to a transaction with Maple. More than $30 billion of global exchange mergers have been scuttled in the last two years.
Thomas Caldwell, chairman and chief executive officer of TMX holder Caldwell Securities Ltd., said on July 5 that the company should seek takeovers of global competitors.
“You’re effectively the dominant exchange in Canada,” said Caldwell. “I think you can go hunting.”
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