At first sight, it looks like the exchange world equivalent of two drunks leaning on each other for support.
The London Stock Exchange and the TMX Group in Canada are in merger talks. The British bourse is a shadow of its former self, cut back by competition from rival trading venues such as Chi-X Europe and twisting in the wind as it tries to build a derivatives business and sort out a proper clearing infrastructure – both things that grown up exchanges such as Deutsche Börse and CME Group in the US have had for years.
The Toronto Stock Exchange, which is operated by TMX, has watched as its market share has been eroded by a Canadian unit of Chi-X and other upstarts. Just look at the pie charts at the top of FT Trading Room for a stark visual on that.
Both the LSE and Toronto are victims of one of the biggest trends sweeping the exchanges globally: competition, and the erosion of exchange monopolies.
And you could hardly call the LSE one of the world’s leading exchanges any more. Its brand may be one of the most recognisable in the world but it has slipped in the rankings to 10th-largest bourse as measured by the market capitalisation of the exchange as a listed entity. TMX is 11th.
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Yet this would be to miss the significance of the deal. It is mostly about one thing: creating a mining listings giant. Both bourses are home to a huge number of mining and resource company listings.
Together they would have more company listings than any other exchange – more than 6,300, compared with NYSE Euronext’s 4,500. And that would create a resources behemoth at a time of high commodity prices and unprecedented activity in exploration.
A next step to boost liquidity in London and Toronto could be offering cross-listings between both markets in key mining stocks, allowing seamless trading across two big time zones, with the obvious attractions that both markets share the same legal system and language. (Can a “Commonwealth” of exchanges be far off, linking Australia, Singapore and India too? Mr Rolet recently inked a co-operation deal with the National Stock Exchange of India.)
In a hint of Mr Rolet’s new resources focus, though, the LSE last month agreed to co-operate with the stock exchange on Mongolia, the latest hotspot for mining and resources. The aim is clear: to land that next big Mongolian resources IPO. That is by no means an outlandish idea.
As for TMX Group, it has for some time been viewed as a logical partner for the LSE. It too is suffering at the hands of competitors such as Chi-X in Canadian stocks. But its TSX Ventures Exchange junior board – similar to the LSE’s Aim market – is booming amid a flood of mining and resources listings.
An early sign of the flirtation between London and Toronto came back in March 2009, when they agreed a “strategic partnership”. The Canadian bourse has provided the LSE with its Sola derivatives trading system and has a 19.9 stake in EDX, the LSE’s small Russian and Nordic derivatives exchange.
Thomas Caldwell, a Canadian who runs arguably the best known fund that invests in global exchanges, Caldwell Financial, says the Sola system has a good track record and has been used by Euronext and others over the years and could help the LSE develop its derivatives business too. “It doesn’t give them a slam dunk but it does give them a system on which they can trade and develop products”.
TMX Group also owns the Montreal Exchange, a derivatives exchange which itself owns BOX, one of the eight options exchanges in the US. So the LSE now has a toehold in the backyard of rivals Nasdaq OMX and NYSE Euronext.
That raises an intriguing possibility: could there be a counter-bid from either of those two US players?