Blockchain technology not robust enough for key stock exchange systems: TMX Group

Toronto Stock Exchange’s operator says Blockchain is ‘not fit for purpose’ when it comes to key sharemarket infrastructure and systems.

Blockchain technology is “not fit for purpose” when it comes to key sharemarket infrastructure and systems and other forms of modernisation are preferred, according to the Toronto Stock Exchange’s operator.

TMX Group chief executive John McKenzie says the firm has done detailed work on researching and understanding blockchain and distributed ledger technology and whether it should be employed to run exchanges and trading and clearing houses.

“It’s not fit for purpose. The technology is actually not robust and not fast enough to handle ­mature, deep, liquid, fast markets,” he said in an interview while on an Australian visit.

“We couldn’t see that using blockchain in those systems actually was solving a problem for the industry, so that hasn’t been our focus.

“In a bit of the euphoria around what blockchain can do, we forgot about how efficient central clearing already was.”

TMX is the world’s 10th-largest stock exchange by market capitalisation. It houses the Toronto exchange, TSX Venture Exchange and Montreal Exchange among other business units, and is replacing its trade clearing systems with an option provided by India’s Tata Consultancy Services.

Blockchain is essentially a digital and decentralised ledger that can be used to link sharemarket participants. It is the technology being relied on by the ASX as it seeks to replace the three decades-old CHESS system with distributed ledger technology to manage the Australian equity market, and was meant to position the ASX for growth.

But the ASX has taken a blow to its credibility after a series of delays with the CHESS clearing and settlement replacement project, which began in 2016.

Investment banks and other trading participants have also expressed angst around the project, given the rollout will affect their systems.

Mr McKenzie would not comment on the ASX’s plans, but said TMX did not see value in blockchain for key exchange systems, despite the promise of real time or same-day settlement of trades.

“In order to do that, you have to pre-fund every single trade, and you don’t get the benefit of settling on a net basis,” he said.

“It’s the kind of solution where if you were building a new market from scratch, there could be value in building it on that basis. We’ve looked at other solutions it (blockchain) could be useful for, things like proxy voting, and we’ve tested around payment pieces.”

Blockchain is ‘not fit for purpose’ when it comes to key sharemarket infrastructure and systems, according to the Toronto Stock Exchange’s operator. Picture: Damian Shaw/NCA NewsWire

TMX houses a smattering of cryptocurrency exchange-traded funds and is also working on its first cryptocurrency futures product. Over the longer term, the firm is assessing whether tokenised and crypto assets can be traded ­directly on its exchanges.

“We are also looking and exploring whether or not there’s a business case and a model to put crypto assets right on the exchange … That’s more exploratory,” Mr McKenzie said.

Mr McKenzie is in Australia this week meeting superannuation funds, investment banks, TMX investors and potential listing candidates, as he seeks to boost knowledge about his exchanges and attract more companies from the Australian market to list or dual list in Toronto.

TMX ranked third globally behind Japan’s exchange and the Nasdaq on the number of listings with, 3563 in the first half of 2022, World Federation of Exchanges data shows. On new listings over the period, TMX was in second spot with 116, behind the Nasdaq with 202 new listings, while the ASX was ranked fifth with 63 new listings.

TMX has 22 Australian companies listed on two of its exchanges, with the bulk being mining companies, while there are a couple of technology stocks.

But initial public offering activity has been weak across many global markets this year, given heightened volatility and rapid-fire interest rate rises by central banks.

In Australia, equity capital markets activity – including secondary raisings and floats – has dropped 38.4 per cent so far this year, given choppy markets and a dearth of IPOs.

TMX has not been immune, with August data for its main bourse showing it had four new ­issuers for the month, down from 10 in the same month last year.

However, Mr McKenzie is ­optimistic on the exchange’s prospects as it seeks to extend its global reach and step up its diversification from mining stocks. He cites 1600 companies in its listing pipeline, with about half of those based outside Canada.

“Confidence for companies to be able to do a good capital raise is based on seeing successful deals get done, so there is a bit of a ­waterfall effect,” he said.

“We’ve actually had a number of larger transactions get done this year.

“About a third of the revenue of TMX is outside of Canada today and we are looking to build that to over 50 per cent.”

Helped by its venture exchange for smaller companies, TMX’s business from technology companies now matches the size of its mining franchise.

“We have a full-time resource in Israel that works in the technology sector,” Mr McKenzie said.

“We’ve had him there for a couple of years, and we’ve brought 17 listings to Canada for Israeli tech-based companies.

“We do specifically target those companies that are more in that middle-cap world.”

On attracting international listings, an ASX spokesman said: “Our listings team regularly visits various countries including New Zealand, North America, Singapore, the UK.

“In addition, we have a permanent physical presence in NZ.”

There are 265 offshore-based companies listed on the ASX and the spokesman said attracting relevant international companies continued to be “an important strategy” for the exchange.