The Stars Are Aligning for TSX Group

It’s good to see TSX Group Inc. return to something that is very likely to fatten its bottom line. Namely, TSX has agreed to set up an integrated market platform for trading energy products in North America with Intercontinental Exchange Inc. (ICE Inc.). The platform will focus primarily on trading natural gas and electricity.

A bit of history here… when the TSX went public about two years ago, the group bought Calgary’s Natural Gas Exchange (NGX) and merged it into the growing family of TSX companies. In this new deal with ICE Inc., NGX is expected to be an important player as a marketplace for 8.1 trillion cubic feet of gas just last year, most of which was delivered in Canada.

As for ICE Inc., its platform trades hundreds of derivatives, such as natural gas and power swaps, futures, etc. Combining the technology and trading power of ICE and NGX with TSX Group’s clout, operations, and financial power should create a beautiful thing. Note that the service is slated to take off in the third quarter.

I don’t have to tell you that energy markets are again showing that they have a pulse. But, that’s not what’s making this deal attractive to investors and consumers alike. Canadians are already aware of the profitable situations in trading physical gas and power. However, south of the border, these markets are largely under- developed, if not undeveloped.

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It’s all about the service. NGX has a superior clearing system for daily deliveries, schedules, and maintenance of natural gas orders. ICE, on the other hand, has a superior trading platform. Put together under the TSX umbrella, the three have the potential to create a borderless natural gas and power market in North America, which could translate into billions of dollars for shareholders of TSX Group Inc. (For our readers south of the border, TSX Group trades under ticker ‘X’ on the Toronto Stock Exchange.)

The key word here is liquidity. Liquidity is of paramount importance to any market, but it is perhaps even more important in the energy markets. By combining the liquidity of NGX and the trading volumes of ICE, TSX Group has potentially created a “Goliath” that not many “Davids” would be able to take on.

To sweeten the deal, both TSX Group and ICE are busy growing through acquisitions. TSX Group is entering a joint venture with International Securities Exchange Holdings Inc. to create an equity derivatives market, which is to be known as DEX and should start operations in about two years. On the other hand, ICE is bidding for CBOT Holdings Inc., which is owned by the Chicago Board of Trade, with an intention to sink the merger between CBOT and the Chicago Mercantile Exchange.

I checked TSX Group’s chart, and the stars seem to be aligning for some serious price appreciation, considering that the stock fairly recently completed a reversal and its chart pattern is bullish in nature — showing the so-called “inverted head-and-shoulders.” I’d keep my eye on this one.