02/05/2014 07:01 EST | Updated 04/07/2014 05:59 EDT

TMX Group Q4 profit rises more than expected, revenue stable at $180.7 million

TORONTO - TMX Group Ltd. (TSX:X) says it is ready to compete against a proposed new stock market in Canada this year, as it saw its profit and revenue rise in the fourth-quarter on higher trade volumes.

"Our goal is to continue to provide high performance, neutral and fair markets for all participants to operate in, regardless of their strategy," said chief executive Thomas Kloet in an analyst call Wednesday.

The proposed exchange, Aequitas Innovations Inc., is backed by Royal Bank (TSX:RY), BCE Inc. (TSX:BCE), Canadian pension fund PSP Investments, and a number of Canadian and international brokerages, and could be up and running by late 2014 if it receives regulatory approval.

Aequitas has stated that one of its goals is to curb unfair practices used by high-frequency traders. It plans to do that by creating a "hybrid book'' so some bid and ask prices are not shown to the public, with access to trades restricted in some cases.

High-frequency trading has been blamed for putting artificial volatility into the markets by using computers to engage in behaviours such as exploratory trading, where small orders are made to see where the big traders will go.

Aequitas argues that traditional investors are at a disadvantage with markets that cater to high-volume trading activities in order to generate revenue.

But Kloet said high-frequency trading is not always abusive, and accounts for approximately 15 to 20 per cent on all TMX Group's exchanges.

"It's incumbent upon the whole structure to make sure that if there is behaviour that is inconsistent with, or abusive to, the... rules that operate in this market — that it is dealt with," he said.

"(But) high-frequency traders have generally narrow spreads, and add liquidity to the marketplace. The customer has benefited enormously by the reduced spreads."

The owner of the Toronto Stock Exchange, the TSX Venture stock exchange, the Montreal derivatives market and other securities exchanges, said a higher volume of trading helped it earn $41.4 million of net income in the fourth quarter, or 77 cents per share.

That was up 27 per cent from $32.6 million, or 61 cents per share, a year earlier.

Its adjusted earnings for the three-month period amounted to 96 cents per share, up one cent from fourth quarter of 2012 and 11 cents above analyst estimates.

TMX Group's revenue was essentially unchanged from a year earlier, slipping by less than one per cent to $180.7 million, and about $7 million above analyst estimates.

Analysts had been looking for about $173 million of revenue and 85 cents per share of adjusted earnings, according to estimates compiled by Thomson Reuters.

Kloet said integration efforts has also helped TMX Group improve execution and efficiency and provide better value to customers.

"But more than that, this effort helps to ensure that our company is well-positioned to conquer the evolving landscape ahead of us," he said.

Last year, TMX Group combined with two companies acquired from the Maple Group as part of a major reorganization.

The Maple Group's members, which included several major Canadian banks, pension funds and other financial businesses, became the leading shareholders of TMX Group during 2012.

As part of the deal, TMX Group acquired Maple Group's Alpha trading system and CDS Inc., which runs the main clearing house for Canadian securities.

The company reported a four per cent drop in listing fees revenue, as it saw fewer new listings on the Toronto Stock Exchange. It was also affected by a decline in market capitalization from current issuers, resulting in a lower amount of fees.

In the fourth quarter, it had $50 million of listing fees revenue, compared with $52.2 million a year earlier.

Last year, TMX Group had 25 new international listings — half of which were resource-based companies.

"We don't apologize for being a market leader in the resource space. It's an area we have domain expertise," said Kloet.

"All that being said, the value proposition we give international issuers goes far beyond the resource space and I think there is further opportunities for us to exploit that and we're working on plans to do so."

TMX Group also warned that it expected its revenue to drop by $17.9 million and operating income by $9.9. million this year, as it deals with the loss of an operating contract for SEDAR, Canada's securities filing system.

Shares in TMX Group were up four cents to $49.90 at midday Wednesday on the Toronto Stock Exchange.