There’s no limit to the types of investment questions Inner Circle members can ask Pat and his team of investment experts. Members often ask for Pat’s advice on Canadian stock market investments they are thinking of buying that we don’t cover in our newsletters. These companies range from large multinational firms to the most speculative penny mines.

Members also frequently ask about specific investment strategies, or how headline-making events could affect their portfolios.

For example, the TMX Group, which operates a number of Canadian stock exchanges, recently announced that it had agreed to merge with the London Stock Exchange (LSE). An Inner Circle member recently asked for our recommendation on TMX Group, and what impact such a merger would have on Canadian investors. To give you a sense of how the Inner Circle works, I’d like to share this question, and our answer, with you. I hope you enjoy and profit from it.

Q: Pat: What’s your take on the possibility of the TMX Group/LSE merger, and is TMX a buy? Also, what would the effect be on investors in the Canadian stock market?

A: TMX Group Inc., $39.68, symbol X on Toronto (Shares outstanding: 74.3 million; Market cap: $3.0 billion), owns and operates Canada’s two national stock exchanges. The Toronto Stock Exchange lists senior equities and the TMX Venture Exchange lists junior equities.

The company also owns the Montreal Exchange, which specializes in derivatives, and the NGX, an exchange for trading and clearing natural-gas and electricity contracts. As well, TMX Group owns Shorcan Brokers, a fixed-income inter-dealer broker, and The Equicom Group, an investor-relations company.

In 2000, the Toronto Stock Exchange became the first exchange in North America to become a for-profit corporation (known as TSX Inc.). In 2001, TSX bought the Vancouver Stock Exchange. The TSX Group first sold shares to the public at $9 (adjusted for a two-for-one split), and began trading on Toronto in November 2002.

In May 2008, the TSX Group paid $1.25 billion for Montreal Exchange Inc. As part of the deal, the TSX Group changed its name to the TMX Group.

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Canadian stock market trading volumes have risen, despite new competition

In 2008, TMX Group’s seven biggest customers, including the brokerage firms owned by Canada’s six biggest banks, launched Alpha Trading Systems, an electronic-trading system. This new competitor has depressed trading fees and taken trading volume away from the Toronto exchange.

In 2010, the Toronto Stock Exchange and TSX Venture Exchange together carried out an average of 73% of all equities trading volume in Canada. That’s down from 86% in 2009, and 98% in 2008. Even so, TMX Group set a new record in 2010 for combined volume traded on the Toronto Stock Exchange and the TSX Venture Exchange. The two markets traded 172.4 billion securities in 2010, up 4% from the previous record of 165.4 billion in 2009.

Canadian stock market: Merger would be a plus for TMX Group—but there are risks

TMX Group and London Stock Exchange Group plc recently agreed to merge. TMX Group shareholders are to receive 2.9963 shares of London Stock Exchange Group plc for each share of TMX Group they own. Shareholders of London Stock Exchange plc would own 55% of the combined company. TMX Group shareholders would hold the remaining 45%.

The TMX-LSE transaction could still fall through. It requires approval from the Canadian federal government and five provincial regulators, including Ontario and Quebec, plus the U.S. Securities and Exchange Commission.

Our buy/sell/hold advice on TMX Group, based on the company’s future potential, and the prospects for its merger with the London Stock Exchange, is only available to members of our Inner Circle. You can’t get it anywhere else! (Note: If you are a current Inner Circle member please click here to view Pat’s recommendation. Be sure to log in first.)

Merger would likely have little impact on Canadian investors

Assuming it goes through, the TMX Group / London Stock Exchange merger is unlikely to have much effect on trading by Canadian investors on the Toronto Stock Exchange or the TMX Venture Exchange. Stock exchanges are highly regulated, and the two exchanges would still be subject to regulation by Canadian securities regulators. Greater efficiencies and lower shared overhead costs could result in lower commission costs. However, the merger could make it easier for Canadians to invest in foreign stocks.

If you’re looking for authoritative advice on investment issues, or fundamental analysis of investments you’re considering buying, you should join Pat McKeough’s Inner Circle. It’s Canada’s most exclusive investment group.

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