TMX Group Ltd

TSX:X

Earnings Call Transcript 2023-Q2

[Operator]

Good morning, ladies and gentlemen and welcome to TMX Group Limited Q2 2023 Financial Results Conference Call. At this time, all lines are in a listen-only mode. [Operator Instructions] This call is being recorded on Friday, July 28, 2023.

I would now like to turn the conference over to Amin Mousavian, VP Investor Relations, Treasury, and Administration. Please go ahead.

[Amin Mousavian, VP, IR, Treasury & Administration]

Thank you. And good morning, everyone. I hope you're all doing well and enjoying the summer. Thanks for joining us this morning to discuss the 2023 second quarter results for TMX Group. As you know, we announced our results late yesterday, and copies of our press release and MD&A are available on tmx.com under Investor Relations.

This morning we have with us John McKenzie, our Chief Executive Officer, and David Arnold, our Chief Financial Officer. Following the opening remarks, we'll have a question-and-answer session.

Before we begin, I would like to highlight that we successfully completed our five to one share split on June 13. And all common share numbers and pressure amounts including comparative figures have been adjusted to reflect the stocks.

Also, I would like to remind you that certain statements made during the call may relate to future events and expectations and constitute forward-looking information within the meaning of Canadian securities law. Actual results may differ materially from these expectations. Information concerning factors that could cause actual results to differ from forward-looking information is contained in our press release and in periodic reports that we have filed with the regulatory authorities.

And with that, I turn the call over to John.

[John McKenzie, CEO]

Thank you mean and good morning, everyone. To everyone listening today, we all hope your summer is off to a great start. And I appreciate you spending some time and dialing into the call today with us to discuss TMX Group's financial results for the second quarter of 2023 and the first six months of the year.

Now before I turn the business, I do want to take a moment and send a message of support out to all those who have been impacted by the wildfires across Canada and actually around the world and express how grateful that we are at TMX for those on the front lines that are working to protect the lives of people in affected communities and providing that essential relief services and support.

Now my comments this morning are going to focus on TMX's first half performance and the important progress that we have made this year in advancing our key enterprise initiatives. Following which, David will take us through the Q2 numbers in detail.

Overall, TMX continues to deliver, reaping the benefits of a diverse and balanced business model and a consistent and disciplined long-term growth strategy. We reported positive results for the surfer six months of the year, with solid year-over-year revenue growth, including record revenue for the second consecutive quarter, despite sustained headwinds across key elements of the capital markets.

Fueled by our purpose to make markets better and empower bold ideas, we are continuing to build TMX ever stronger, more capable, more innovative, and more resilient to continue to deliver innovative solutions and a clear path for success of our clients and stakeholders across the markets we serve around the world long into the future.

TMX reported revenue of $605.3 million, a 6% increase from the first half of last year, driven by double-digit growth in revenue from our Information Services businesses, or GSIA, which includes Trayport and TMX Datalinx, as well as increased revenue from capital formation, derivatives trading and clearing excluding BOX. Actually excluding BOX revenue increased actually 9% in 2023. These gains were partially offset by decreased revenue from equities and fixed income trading due to lower trading volumes on Toronto Stock Exchange TSX Venture Exchange and alpha and lower capital raising activity.

On an adjusted basis, diluted earnings per share for the first six months of the year was $0.75, a $0.01 increase from the same period in 2022.

Our total reported operating expenses increased 9% compared with the first half of last year, largely driven by inflationary pressures and FX impacts, but also by discrete investment choices we have made as an organization to accelerate our long-term growth. And David's going to dig into this deeper he has written his remarks to follow.

Moving now to our business areas, starting with Global solutions Insight and Analytics, our fastest growth business area. GSIA represents 34% of TMX's revenue in the first half of 2023, up from 31% in the same period of last year. Revenue from GSIA was $207.3 million, a 16% increase from the first six months of 2022 reflecting higher revenue from Trayport, our connectivity platform and service provider for European wholesale energy markets, and TMX Datalinx our Information Services division. Trayport's first half revenue grew 18% or 15% in common currency pound sterling, compared with the same period in '22, driven by a 9% increase in traders subscribers, annual price adjustments and the impact of a favorable FX rate.

Trayport core jewel network connects serves and supports a growing ecosystem of participants, execution venues and clearing houses across world power and natural gas markets. And Trayport continues to pursue innovative ways to enhance the overall client experience for energy market participants by augmenting trading tools, insights and analytical capabilities across its core jewel network.

And in addition to areas of strategic focus in our business, Trayport continues to seek out expansion opportunities and new asset classes and new geographies, as global energy markets continue to evolve. We continue to work on building the voluntary climate marketplace, a collaboration with IncubEx launched last year and designed to provide clients with the broadest possible view of the fragmented voluntary carbon market.

TMX Datalinx revenue was $113.6 million in the first six months, a year-over-year increase of 14% due to higher revenue from data feeds colocation benchmark and indices and corporate and reference data, as well as a favorable FX impact from a stronger U.S. dollar.

The first half of the year was marked by important progress and notable milestones for our Information Services business, including strategic investments as we move to expand our capabilities, broaden our datasets, and deliver leading edge analytics and tools to our clients. The first half revenue included $3.4 million from Boston-based Wall Street Horizon, a provider of global corporate event datasets acquired late last year.

And earlier in 2023, we made a strategic investment in VettaFi, a global indices and ETF service provider which includes a commercial agreement. TMX and VettaFi teams are continuously working together towards the development and delivery of new client-centric index and benchmark products into Canada.

And earlier this week, we took another step forward in our benchmark and indices strategy and product roadmap, as we finalize an agreement with our partner CanDeal to participate in the creation of the new term Core Benchmark. A CanDeal affiliate will operate the Benchmark administrator and TMX Datalinx will provide licensing and distribution capabilities.

Now as you can clearly see, information is key to our long-term global growth strategy. It's a vital strategic need enabler as we enter into the next phase of TMX's evolution. And across the organization, we're also focused on new ways to leverage our robust proprietary datasets to solve existing and emerging client challenges.

Now with that, let's turn our attention to the Derivatives business. Excluding BOX revenue from Derivatives trading and clearing was $82.2 million in the first half of 2023, a 9% increase from last year driven by higher revenue from MX and CDCC, due to increased volumes traded and cleared. MX total first volume grew 13% compared to 2022, and the level of overall open interest at June 30 2023, represented a 17% increase from the same date last year.

Recent additions to MX's product suite are proven effective in creating efficient cross market trading opportunities and continue to gain profile among global investors. Strong first half performance was driven by significant growth and activity along MX's interest rate product line, with volumes up 19% in the first six months of 2022, and 6%, growth in volumes and equity derivatives.

Some of the other highlights and trends within the activity include ETF options, specifically broader index financials REIT and crypto sectors show continued strong interest among investors with volumes up 46% compared to the first six months of 2022. Investors were very active in the short term interest rate products due to the act of central bank policy environment. Volume traded in the backs or core contract were up 33% and volumes in the CGZ MX's two-year government of Canada bond futures contract increased 90% compared to the first six months of 2022.

Now looking ahead, a key priority for MX -- the MX initiative is the transition from CDOR to the Canadian overnight repo rate average or CORRA, with full cessation of CDOR on track for June 2024. The three-month CORRA futures or CRE continues to gain traction, reaching an average daily volume of approximately 14,000 contracts in the first half of this year.

Now turning to capital formation, revenue was $144.6 million, a 5% increase from the first six months of 2022, reflecting higher issue services revenue and partially offset by lower financing, lower revenue from additional listing fees due to a decrease in the number of financing transactions on Toronto Stock Exchange, and decrease in dollars raised on both TSX and TSX Venture Exchange. Revenue from other issuer services, which largely consists of the TSX Trust business, with $60.9 million a 50% increase compared to the first half of large last year and driven by higher net interest income slightly offset by lower transaction fees.

Macroeconomic factors including sustained high interest rate environment, and inflationary pressures continue to weigh on capital raising activity during the first half of the year. And while the number of new listings on TSX and TSX Venture decreased year-over-year, the pipeline of go public prospects is robust and we are confident and a resurgence as conditions normalize.

Our unique two-tiered ecosystem remains the choice for small and medium sized enterprises here in Canada increasingly around the world. Team Exchanges ranked third amongst our gold peers by the number of new international listings during the first six months of the year. And more than half of those new companies joined our markets from the U.S. Our business development efforts to continue to promote TSX and TSX Venture's value proposition among early stage companies in targeted regions across the U.S.

And consistent with our history of industry leadership, and innovation, TMX continues to be focused on the future of our markets. Last year, our capital formation team undertook an important initiative called Venture Forward, designed to solve the current challenges of stakeholders across our vital venture community and strengthen our markets into the future.

TSX Venture has an impressive track record of launching early stage public companies funding primarily growth stages and providing us investors with access to unique smallcap investment opportunities. But we can always do better. And so, in June this year following an extremely productive and in-depth consultation process, TSX Venture produced a comprehensive report that outlines our commitment to doing better in support of innovation and growth, and in order to clear path for new company's investors to enter our ecosystem.

The key Venture Forward commitments include, a TSX Venture fastforward listing process to accelerate the listing and capital raising timeline for qualified new listing applicants. The TSX Venture Sandbox, an initiative to better support the listing of unique businesses or transaction structures. And third, to evaluate the potential need for a new and highly differentiated exchange to complement TSX Venture with the goal of providing new categories of early-stage companies, alternative asset classes and investors with access to public markets.

Venture Forward's commitments are in lockstep with TMX's corporate purpose across the organization as we're pursuing new ways to make markets better. And our equities trading business earlier this year, we announced two new order books on TSX Alpha Exchange, Alpha-X, a visible lit order book, and Alpha DRK, a dark order book. With initial features designed to improve execution quality, and provide traders with innovative new functionality, the additional order books established new platforms for continued innovation and enhance overall trading experience. And we are on track with this initiative to go live this fall as planned.

Earlier this month, we published a consultation paper seeking industry feedback regarding trading of a digital assets, including cryptocurrency on TSX Alpha exchange. And our view Canada has an opportunity to be a world leader here, and providing a fair and transparent structure for investors to participate in the growth of the digital asset industry. But like all we do, our priority focuses on serving the needs of our clients and stakeholders. So industry feedback, well inform TMX's next step, and we will update the market on our plans as appropriate.

In closing today, I'd like to thank all of our partners across the capital markets industry, stakeholders, clients, participants, regulators, for their continued partnership and support.

And with that, let me turn the call over to David.

[David Arnold, CFO]

Thank you, John. And good morning, everyone. TMX results for the second quarter reflect our continued commitment to invest in long-term growth, while managing uncertainty in the macroeconomic environment. It was another excellent quarter, with record revenue of $306.2 million a 7% growth compared with Q2 of last year, as reported. Our operating expenses increased 8% this quarter, as we invest to position ourselves for further growth, which I will talk about in more detail shortly.

We reported an increase of 6% in our diluted earnings per share this quarter, driven by $9.6 million of higher income from operations compared to Q2 of last year, partially offset by a higher income tax expense of $6.3 million due in part higher earnings, coupled with an increase in the UK corporate income tax rate from 19% to 25%, which came into effect on April 1 of this year. Our adjusted diluted earnings per share remains unchanged at a robust $0.38.

Turning now to our businesses. I will start with the segments where we experienced increased revenue this quarter. Revenue in our Global Solutions Insights and Analytics segment grew by 18% this quarter with double-digit growth from both Trayport and TMX Datalinx. Revenue from Trayport was up 24% and Canadian dollars was 17% in pound sterling, due to a favorable FX impact of $2.9 million. The 17% increase in pound sterling was primarily driven by a 10% increase in trader subscribers, in addition to our annual price adjustments, and a growth in total subscribers.

Revenue in our TMX Datalinx business grew by 13% driven by increases in data feeds colocation, enterprise agreement renewals, Datalinx express true-ups, benchmarks and indices, and the impact of 2022 and early 2023 price adjustments which were spoken of in prior quarters. There is also an increase of $1.8 million from the inclusion of Wall Street Horizons revenue this quarter, along with the favorable impact -- FX impact of approximately $1.5 million from a stronger U.S. dollar.

The average number of professional market data subscriptions for TSX and TSX Venture Products remained unchanged in the quarter compared with last year, where subscriptions for the Montreal exchange grew by 2%. This is the second quarter in succession, our TMX Datalinx business has delivered double-digit revenue growth, well in excess of our long-term objective of strong growth, which defined as 5%-plus.

Turning to capital formation, revenue was up 10% this quarter, primarily from a 55% increase in TSX Trust revenue, reflecting higher net interest income driven by higher balances, higher rates and above average corporate actions activity. This increase was partially offset by lower additional listings fees in the quarter due to decreases in both the total number of financings and total financing dollars raised, as well as lower initial listings fees. The additional listing fees decrease reflected an 11% decrease in the number of additional listing transactions billed at the maximum listing fee of $250,000 and a 23% decrease seeing the number of transactions billed below the maximum fee on TSX.

Derivatives trading and clearing revenue excluding BOX was up 4% in the quarter driven by a 3% increase in revenue from the Montreal exchange and a 6% increase in CDCC. The Montreal exchange revenue increase reflected in 11% volume increase this quarter compared to the second quarter of last year. Along with the positive impact from the pricing changes, which came into effect in January of 2023. This was somewhat offset by an unfavorable product and clients mix.

Turning to BOX, BOX revenues decreased 7% reflecting a lower rate per contract, which more than offset the 23% increase in volumes on BOX in the quarter, and the favorable FX impact of approximately $1.2 million on BOX revenue from a stronger U.S. dollar. Of note, BOX's market share in equity options remained flat at 6%. As a result, the entire Derivatives trading and clearing segment reported flat results this quarter, as the increases in the Montreal exchange and CDCC will offset by a decrease in reported BOX revenue.

Revenue from my Equities and Fixed Income Trading and Clearing segment decreased 4% in the quarter, compared with the second quarter of last year. This decrease was driven by a 28% decline in the overall volumes of securities traded on our equities marketplaces. Trading volumes on TSX decreased by 28%, TSX Venture Exchange about 22% and Alpha by 40%. Despite the downturn in volumes, we saw gains in our combined market share this quarter, which was up 1% for TSX and TSX Venture Exchange listed issues.

On the fixed income trading side, revenue increased versus Q2 a year ago, reflecting higher activity and swaps partially offset by decreased activity in government of Canada bonds. Revenue from our CDS business was up 7% reflecting high interest income on clearing funds, event management fees and standby liquidity fees.

Turning now to expenses, as mentioned earlier, operating expenses in the second quarter increased 8% on a reported basis compared to last year. More than half of our increase in expenses is driven by inflationary pressures coupled with higher foreign exchange rates. While the remainder is driven by targeted investments we are making in growth areas of our business in order to accelerate a long-term growth.

As is evident from our disclosures, we have increased our full-time equivalent employees. These increases are in targeted areas of our business that are driving high growth, most notably Trayport, and TSX Trust. In addition to acquisition of Wall Street Horizon, with over two thirds of our staffing increases in our revenue generating business, the balance is across our core corporate functions to support our businesses, most notably a Global Technology Solutions team, which accounts for the majority of the remaining one third.

In addition to increase staffing, we have increased our discretionary investments driven predominantly by growth investments in our Trayport, Trust, Markets and Derivatives clearing businesses, in addition to lower capitalization of our post-trade modernization project during the slowdown period, as we address the industry wide move to accelerate the move to T plus one, as I noted in the first quarter.

Given our investments to drive higher growth both in 2023 and beyond, and lower capitalization for the post-trade modernization project during the slowdown period, our quarterly expenses are expected to hold at the current level for the remainder of the year, consistent with what we had previously communicated. In other words, the best indication of future spend levels is our current run-rate. While there may be quarterly fluctuations, I expect our first type of expenses to be the best indication of our second half spend levels.

Turning now to our sequential results. Revenue increased $7.1 million from the first to second quarter, primarily reflecting higher TSX Trust revenue, driven by an increase in net interest income and higher additional listings fees due to an 82% increase in the number of transactions billed at the maximum fee, as well as higher Trayport revenue on the back of an increase in subscribers and a number of long-term deal renewals.

This was somewhat offset by lower equities and fixed income trading, driven by 19% decline in the overall volumes of securities traded on equities marketplaces, as well as lower derivatives trading and clearing revenue, reflecting a 10% decrease in volumes for the Montreal Exchange and CDCC.

Operating Expenses remained unchanged from Q1 to Q2, much like we intend to do as we head into Q3 and Q4 as I mentioned earlier.

Turning to our balance sheet, in the six months leading up to June 2023, we spent $16.8 million repurchasing 622,090 shares of our common shares and our normal course issuer bid program. A debt to adjusted EBITDA ratio was 1.9 times at the end of the second quarter, down from two times at the end of the first quarter. And we also held over $470 million in cash and marketable securities, which was about $295 million in excess of $175 million we target to attain for regulatory and credit facility purposes.

Last night, our board approved a quarterly dividend of 18 cents per common share, payable on August 21, to shareholders a record as of August the 11. This is a 3% increase from our Q1, and follows on the heels our recent increase in Q4 of 2022. And most notably, this is also a third increase in 18 months. With this increase, we will pay out 47% of our adjusted Q2 earnings per share, which is marginally above the midpoint of our target payout ratio of 40% to 50%.

Our consistent growth in earnings and discipline capital management track record, underpins our confidence to continue to generate growing free cash flow and remain focused on executing our long-term global growth strategy that John referred to, to deliver increased value to our shareholders.

With that, I'd like to turn the call back to Amin to initiate our Q&A period.

[Amin Mousavian, VP, IR, Treasury & Administration]

Thanks, David. Anas, would you please outline the process for the Q&A session?

[Operator]

Thank you, ladies and gentlemen, we will now begin the question-and-answer session. [Operator Instructions] Your first question will come from Ben Budish with Barclays. Please go ahead.

[Ben Budish, Barclays]

Hi, there. Thanks so much for taking the question. Maybe one for David, just the sequential increase in the Trust revenues was a bit higher than we were expecting. I was wonder if you could kind of parse that out a little bit more. I mean, you mentioned a couple of different factors, more corporate actions, higher rates, higher balances. How did the three of those like relative to each other sort of impact the quarter?

[David Arnold, CFO]

Thanks, Ben. So you're right, Q2 is higher than then Q1, that's actually a recurring phenomenon. So typically Q2, we see a little bit more activity than we would see in Q1, Q3 and Q4. So if you look back, historically, you'll see that. In addition, though, then you are right, there are higher rates this quarter, and also higher balances and higher corporate actions. But we really don't go into kind of parsing them all out into individual components. That's a disclosure, we just have historically not done.

So what I would do is look at the Q1 balance for the Trust revenue, I would adjust for any rate increases between Q1 and Q2. I then also look at historical kind of Q2 analysis to see what the norm is. And then I'd use that as a jumping off point for as we go into Q3.

[Ben Budish, Barclays]

Got it, that's helpful. And then maybe just kind of one follow up on the same topic. Just an update on sort of the cross-leg initiatives between the Legacy Trust business and AST the progress kind of moving that product market? Where are you in that sort of process?

[David Arnold, CFO]

That's a great question, too, Ben, and John will probably add in here as well. That's actually a big reason why we did the AST acquisition was to give us an opportunity to participate in more trust mandates, larger corporate actions. And so you're seeing the benefits of that in Q2, as you do the analysis. You'll see that there's larger corporate action activity. John, do you want to add anything.

[John McKenzie, CEO]

Yeah, I think that's exactly right. So if thank you for the question. I mean, our whole investment thesis when we did this was to be able to be able to support a larger base of clients with more diverse needs. And you see that that in Q2 is exactly that kind of result, when you've got a larger base of clients and we can support multiple products across that we can cross sell, upsell, or provide additional services like trust mandates, and allows us to participate in more and much larger corporate action activities than we could have in the past.

So while to David's point, that step up in Q2 isn't necessarily indicative of a run-rate. And we want to guide you back to kind of what the Q1 mil plus growth looks like. It is indicative of the broader potential given our larger service base the services we can provide the cross selling opportunities and the bigger clients that we can serve. So it's exactly as you suggested. And it's working very well you see that and the result.

[Ben Budish, Barclays]

Got it. Thanks so much, guys.

[Operator]

Your next question comes from Nik Priebe with CIBC Capital Markets. Please go ahead.

[Nik Priebe, CIBC Capital Markets]

Yeah, thanks. In the prepared remarks, I think you alluded to a partial concentration of staffing growth at Trayport. And I understand your guidance is for flat operating expenditure at the enterprise-wide level for the balance of the year. But as we look out into 2024 and 2025, can you talk a little bit about the prospect of operating leverage at Trayport, specifically, and the need for incremental headcount additions as the subscriber base continues to grow over the next few years?

[John McKenzie, CEO]

Great question. So normal course, we were going to have positive operating leverage in the multi-basis, multi-percentage point kind of gap. But as we obviously go to invest in growth, there are periods where either on a quarter basis or a half year basis, we will see that actually compress a little bit.

Our 2024 jumping off point will be 2023. 2023, as you can see, relative to 2022, we are investing in long-term growth. I would expect it to moderate in 2024, and 2025. But that's absent any kind of opportunistic opportunity that we might actually see and take advantage of.

Specifically, when you talk about Trayport. I mean, one of the things that's important, our Trayport franchise is our jewel direct platform. Our Jewel direct read platform is something that we do feel we can continue to improve and modernize. There's lots of talk about cloud architecture, and more agile approach to responding to a client's needs. So I know our Trayport team are looking very closely at that and doing early stage investing to actually modernize that platform.

[Nik Priebe, CIBC Capital Markets]

Understood. Okay, very good. And then my second question, just maybe stepping back for a moment. With some of the investments that you've made last year in early this year, Wall Street Horizon and VettaFi as an example, do you expect to upstream any cash flow via dividends from those investments? Or are those businesses more focused on being in growth mode? I'm just trying to get a sense of what the contribution at some of those businesses might be to cash build over the next year or two?

[John McKenzie, CEO]

Yeah, that's a totally fair question. So let me separate them because they are different types of investments. So Wall Street Horizon, we will in the next quarter, essentially complete our integration business. And it will operate as a product line within our Datalinx franchise. So all of the growth in it, and it is a -- it's a high-single double-digit growth as well, with the potential to be higher, will accrue into the Datalinx business and the cash flow that goes with that. And then as we execute the, the rest of the integration, there will be some synergy potential in that business as well.

So think of that more as a traditional small tuck-in with that cash flow flowing right through the business as we continue to grow it.

The difference around VettaFi being that we're in the 22% stake. We're 22%, the business itself, has some debt financing is as well, it has the actual amortization of the investments that is made. And that's why you don't see a full pull through in the stage right now. It is we would deem it to continue being that growth mode where it's reinvesting to grow faster. It is a high growth franchise, we wanted to continue to do that.

Both Jay and myself participate in the board of VettaFi and that's the ambition that we all collectively have for that business. So in the near term, I don't see that as being a as you said, like a dividend producer for us. But as you know, we've got long-term ambitions to continue to build out in the index and analytic spaces. And those initiatives as we build them in partnership with VettaFi will accrue to cashflow for the organization.

[Nik Priebe, CIBC Capital Markets]

Understood. Okay, that makes sense. That's it for me. Thanks very much.

[John McKenzie, CEO]

No problem.

[Operator]

Your next question comes from Etienne Ricard with BMO Capital Markets. Please go ahead.

[Etienne Ricard, BMO Capital]

Thank you. And good morning, I'd like to circle back on the ongoing transition from BAX to Corra of the Montreal exchange. So two questions, I guess. First, how is the adoption of the Corra product comparing to your initial expectations? At what point would you expect volumes to be comparable to what it used to be on the BAX once the transition is completed next year?

[John McKenzie, CEO]

That's a fantastic question. So actually, we're farther ahead than we expected to be at this point, given the actual cessation of CDOR isn't around till the middle of next year. So the fact that the average volumes in the Corra are already 14,000 contracts a day. And I actually think in the last number of months, we've been more in the 20,000 to 30,000 range is a really strong start.

And we are also just in the stage where the actual benchmark and agreements the normalization of the presentation in the benchmark of course based on our getting institutionalized in the street. That's why we mentioned the partnership agreements that we've done with Canada the mandate -- sorry with CanDeal, the mandate we have collectively taken on from the Bank of Canada to produce that index to distribute it to produce the number to distribute the data around it.

So we are still in the early stage of the development. So the fact that we've got that level of volume in the contract is actually very strong. The expectation is, is really good. When you get closer to cessation, that you'll see these products converge. And so we'll give them guiding people in terms of when you look at the volumes in both the CRA contract and the BAX contract, you really look at them in combination.

And you will see that volume migrate over time right now it's more BAX than CRA. And we will expect that to continue to adjust as we get closer to the transition date next year. And that's what's been driving a lot of our short term results is that return to the trading in both the BAX and the CRA after last year, which if you remember was light, given the very volatile environment and central bank rates.

So that's our guide on that. And we'll continue to monitor a quarter-on-quarter and keep you up to date.

[Etienne Ricard, BMO Capital]

And will economics be similar?

[John McKenzie, CEO]

Similar in the long run. So in the initial stages, we do our work right now we do have, like we have with other two year and the five-year we have market making agreements with the CRA product to help build the volume in that business. So in the initial stage, particularly this year, next year, there is a different capture rate on that product. But as we get into normalization and maturity, it should look very similar to the BAX product.

[Etienne Ricard, BMO Capital]

Understood. And I guess, just switching gears on the Boston Options Exchange, what I find interesting is that U.S. equity option volumes still remain strong relative to pre-pandemic levels. What are your thoughts on the sustainability of volumes seen across the industry and more specifically at BOX?

[John McKenzie, CEO]

I mean, we've got reasonable confidence that they're very sustainable. And so I mean, you talked about volumes, and we talked to market share, and David talked about market share a little bit in his remarks that, we've been actually very stable in market share around 6%. In fact, some rounding there, we're actually up about half a percentage point year over year in terms of BOX capture the market.

If you look at the historical market for options in the U.S., this is a market that has historically grown in the mid-teens year-after-year. I'm sure you have some seasonality around that, and some cyclicality, but the long-term trend is for strong growth in that market. So we see this as being sustainable and a continued growth potential.

The only real change in kind of the year-over-year is just the mix of business. So because you've got contracts, that will trade at different price points, given the volume of some large block trading, the fact that we've got floor trading as well, you see that impact in terms of the revenue year-over-year, despite the fact that our year-to-date volumes are about 14% in BOX.

So I mean, we really happy with the performance of the business, the performance of the team there. And would guide that kind of the revenue capture that you've seen in the first half of the year this year, which was also similar to why wasn't kind of last quarter of last year is a good indicator going forward, pending any other changes in the mix of what gets traded.

[Etienne Ricard, BMO Capital]

Thank you very much.

[Operator]

Your next question comes from Jaeme Gloyn with National Bank Financial. Please go ahead.

[Jaeme Gloyn, National Bank]

Yeah, thanks. Good morning. Just wanted to just dig in on a couple of items from the previous questions. So first on the Trust, TSX Trust. Understood that 2Q seasonally higher. Was there anything else in Q2? Was there unusually higher corporate actions in this quarter relative to a normal quarter? Or would you look at Q2, 2024 is looking pretty similar?

[John McKenzie, CEO]

So I've got to be careful my guidance here because I don't want to disclose anything related to specific clients. I would say there was an unusually higher in terms of corporate actions, but also larger. So some very large corporate actions that would be not the type that happen every single quarter. So I wouldn't give you a year-over-year commentary there because it really depends on client activity and the corporate actions they are pursuing and the size of them.

[Jaeme Gloyn, National Bank]

Right. Okay. Understood on that front. And then over to VettaFi, question was on cash flow and I think it's somewhat tied to it. But thinking about profitability and how that flows into equity income for TMX. Obviously, the M&A activity and the growth mode is stripping out the opportunity to deliver that TMX. So is that what you see some more timing on that front? Is that kind of the same theme?

[David Arnold, CFO]

Yeah. So why don't I go first, Jaeme, and then John could talk a little bit about the business. I think part of the dynamic right is that we pick it up as an income from associate if you will, we own 22% of the business. So in a quarter, or a period of reporting period, whether it be a six month or a year, where VettaFi has a very little M&A activity. We're picking up a net income number that is pretty much the sustainable, but we're have a quarter where they're making lots of acquisitions. They've got a number of integration and transition costs, let's say, as well as to the extent that they're amortizing intangibles.

If we owned 100% of the business, we would actually adjust for those, and you would have full transparency, but because we don't consolidate them, because we only have 22% stake, the accounting rules are pretty clear. We pick up our share of the net income. So there's John and I've indicated in previous calls when we spoken of the investment that's causing it to be somewhat muted. But these are all investments for growth. So we are not in this for the equity income pickup at the 22% level. It's driven by a partnership agreement to create indices and benchmarks in Canada. And we have a desire to own more of the business to the extent it becomes available.

So that's why you're not seeing it in the in the financial results. And it doesn't really drive the cash flow. But John, you've got some business context?

[John McKenzie, CEO]

Yeah, the only other piece I'd add to it is give you more context of the performance of the business first half of the year, kind of the EBITDA-type margins are in line with what you would expect our GSI franchise to look like. So the performance is, as we would expect, and as you would want to see. But as David said, the accounting of it, because it's not a wholly owned sub, because we need to take in the amortization, the debt financing that's in there, those types of things, is what meets it. But I can't confirm that that's the kind of return we're seeing.

[Jaeme Gloyn, National Bank]

Okay, that's good. Maybe last one for me, just on the on the venture forward and discussions around a potential new exchange within the TMX family here. Is that something that you would expect to see compete with the CSC, which is starting to see a little bit of market share gains? Or is this something that completely new to the Canadian market?

[John McKenzie, CEO]

So I'm going to take the latter part of your statement first, and just correct the record. Because we've actually seen this year particularly substantial uplift activity from CSC on to both the Venture Exchange and the senior market. And if you look at some of the commentary from some of the companies that have moved over extremely strong in terms of the CEOs and the listing experience they've had and the access to capital they get with our markets.

What we're thinking about in terms of net new market, as we have heard, and part of our strategy is how do we bring public market capabilities to a broader issuer base? And how do you support companies that are otherwise private today? So not just looking at other competitive exchanges, but companies that trade privately, new types of structures, tokenization different types of assets. And we do have a little known marketplace actually, within our committee structure called [indiscernible]. It actually fits below the Venture Exchange. And it's a marketplace that we generally use to kind of capture shell companies, restarts, repurposed vehicles, things like that.

And so as we explore we're looking at is that the right vehicle for providing more access to capital for different types of companies or is a replacement or augmentation? Is that the right way to go, where if we brought out a new model structure was more of an open concept, more digital oriented, in terms of how it facilitates? Can we support a broader base of issuers that are looking to raise capital and trade?

So it's really more from navigate that landscape of how do we expand the universe of companies we can support, then how do we compete down market is the way I would suggest it to you? And we're really in the process now that next stage of consultation with the industry of what could it look like what would be the problems that we're solving. But the fact that it's in there came directly from the guidance that we got from the street, which there -- there are issuers that could raise capital. But the current model both in ours and other marketplaces, doesn't support the needs they've got and another model could do it. So that's the way we think about it. And we will continue to do update as we go forward.

[Jaeme Gloyn, National Bank]

Okay, good. Thank you.

[Operator]

Your next question comes from Graham Ryding with TD Securities. Please go ahead.

[Graham Ryding, TD Securities]

Good morning. Very strong quarter with your margin income, so you're benefiting from higher rates right now. If we start to look forward into 2024-2025, when rates could be coming down, expect there to be an unnatural offset in that sort of scenario where your margin income might come down a bit, but you would expect to see higher activity in additional listings and IPOs. Is that a natural sort of offset that you expect in your business?

[John McKenzie, CEO]

You've got it exactly right. So if we saw normalization and rates we do expect to see that activity will pick up. And now I will give you that the touch point we are seeing. Also, we're still muted very much year-over-year, we are seeing additional listing activity start to accelerate in the second quarter.

So the actual transaction activity, the number of transactions you're seeing in venture is now up, it's actually now up on the year as well. The number of transactions that are happening on TSX is accelerating from where we were in terms of a very low position at the beginning of the year. These transactions are generally are smaller in size, but as companies test in the marketplace. So in normal conditions, I'd say yes, as rates come down that financing activity, certainty values in the marketplace can tend to appreciate. But it doesn't have to happen in terms of rates coming down for us to see a resurgent and capital raising activity.

Now, we are now call it kind of 12 months into a tighter period, you will have balance sheet rebuilding needs and companies, you have companies that have been on the sidelines in terms of expansion opportunities, companies that raised money and kind of 2021 that are going to need to reraise. And so any period we've had in the past of this kind of pullback and capital raising activity 12 to 24 months later, you start to see very strong resurgence. So that's exactly what we're actually anticipating, regardless of whether or not we see a reduction in the rate regime in the near term.

And we certainly have both anecdotally from other bankers that we talked to, but from our own folks that are working on the pipeline. We know there are substantial companies that are ready to access to capital markets, when they see those conditions normalize.

So it's actually less about the rates coming down and more around confidence and valuation on the equity market. So it's going to support the capital raising piece, but a lower rate regime does often help with valuations on the equity market.

[Graham Ryding, TD Securities]

Okay, understood. Maybe just update on Trayport. Just on the expansion into the U.S., is there any color on that initiative? And is it impacting revenue in a material way yet? Or is it still, not early, early days, buildout phase?

[John McKenzie, CEO]

It's still in a buildup phase, but with material progress. And so we actually updated board yesterday, and Peter and team giving a full deep dive to our board in terms of how to Trayport progressing. Run-rates for our revenue out of the U.S. are now more in the 4 million pound range. So again, that's another lift from where we were last year. But it's really the exciting piece is actually in client adoption, we've got multiple brokers that are connected to the platform. Now we've got multiple hedge funds that are connected to the platform now.

Now in any kind of adoption curve, those brokers are largely using Trayport and what I call whiteboard capacity, so they're using the Trayport technology, but they're using it more internally in their own shops. As they get more comfortable with it, and the willingness to then post those prices more publicly, then we can actually then bring more traders into the community as well and build the network out as we've done in Europe.

So that's kind of the building block piece. We build it with the clients and they start to use it in their shops. And then as they expose their prices to a broader audience, we can actually bring more traders into the community as well. So really happy with the progress that the team is making in terms of bringing new clients in and getting them using the platform.

[Graham Ryding, TD Securities]

Okay, great. And then my last question, just on VettaFi and the idea of partnering with them to create new -- is there any update there? Is it still too early on strategic front?

[John McKenzie, CEO]

I mean, it's early to give updates on actually where we've actually delivered results, because we're only a few months into it. But it's not too early in terms of the progress of the initiatives we're pursuing. So we're already actively engaged together with which VettaFi products we can actually bring to the Canadian marketplace, where we can do joint data distribution. VettaFi has got some very interesting digital distribution capabilities.

So we're looking at how we use those capabilities jointly to expand both of our product suites. And we have a suite of index products under consideration, based on both Canadian and global datasets, that we could build new indices with verify.

So the workflow is there. And in terms of around the actual output that will come shortly. I mean, at this point though, we also have, as I mentioned kind of distributing VettaFi product. We've got 20 of the flagship indices now available in the TMX webstore for the broader TMX audience. So we are getting that leverage of the business, but in terms of it delivering in terms of dollar results in their franchise is very early days still.

[Graham Ryding, TD Securities]

Okay, great. That's it for me. Thank you.

[John McKenzie, CEO]

No problem.

[Operator]

Your follow up question comes from Jaeme. Please go ahead.

[Jaeme Gloyn, National Bank]

Yeah, just a real quick one here in terms of the dividend increase this quarter. Timing kind of a little bit different than what we've seen recently. Is there anything that we should think about from a timing perspective getting more irregular every two quarters or is this something that we -- have you have you thought through in terms of how you think about dividend increases?

[John McKenzie, CEO]

Jaeme, if you're saying that we've got you baffled on timing, then we've hit our objective. We are -- we're not looking to be programmatic, like a bank that's delivering every two quarters. We really look at conditions of where we are in our payout ratio. This is earlier than we went last time, but also coming on the back of our five for one split this up just to bring it to more of a round dividend number and in line with a payout objectives that we've been targeting. So I believe David puts us kind of the high end of our 40% to 50% range.

And you should take the signal of confidence of our continued ability to grow the franchise and grow the free cash flow that can support continued growth in dividend.

So we're not going to anchor in on specific timing. We will continue to anchor in on the payout ratio and the growth with the overall franchise.

[Jaeme Gloyn, National Bank]

Got it. Thank you.

[Operator]

Thank you, Jaeme. There are no further questions at this time. I will turn the conference back to Amin for closing remarks.

[Amin Mousavian, VP, IR, Treasury & Administration]

Thank you, everyone for listening in today. And we look forward to connecting with you throughout the remainder of this year as we make progress in our strategic priorities. If you have any further questions, contact information for Investor Relations, as well as media as in our press release, and we'll be happy to get back to you. Until next time, goodbye.

[Operator]

Ladies and gentlemen, this concludes your conference call for today. We thank you for participating. And ask that you please disconnect your lines.