News that Alpha Group will be lowering its trading fees effective August 1 could have a negative impact on market leader TMX Group Inc. (TMXGF.PK), particularly because Alpha is offering free Market Open trades.
TMX does not disclose what percentage of its trading volumes come from Market Open activity, but RBC Capital Markets analyst Geoffrey Kwan estimates as much as 5% of total volumes traded in Canada relate to these trades. He told clients that 2010 forecast GAAP earnings per share for TMX could fall by roughly C$.12 (or 4.5% of RBC’s C$2.65 forecast) for each 1% of Canadian volumes captured by Alpha for Market Open trading.
Mr. Kwan said:
There now appears to be an incentive (from a cost perspective) for traders to execute Market Open orders on Alpha, but we believe the TMX Group’s greater liquidity could help delay any migration of Market Open orders to Alpha.
The analyst expects TMX to take a ‘wait-and-see’ approach before responding with any further trading fee reductions. Nonetheless, he told investors to consider the reality of pricing pressure in today’s equity trading environment and that further reductions from are players are likely in the near to medium term.
RBC rates TMX at Underperform with a C$30 price target.
While we like the long-term growth story at the TMX Group, we believe that valuation upside could be limited in the near term owing to concerns regarding equity trading (increased competition, pricing pressure) and market data (potential regulation of fees), which combined account for almost 40% of our 2009 forecast revenues.