TMX Group CEO John McKenzie’s main job is helping other companies become rich and famous. The company he leads oversees Canada’s main exchanges, including the Toronto Stock Exchange and the TSX Venture Exchange. When an IPO pops, or a new ETF emerges that lets the masses share a piece of the next big thing, TMX helps make it happen. 

McKenzie seems poised to start making more noise on his own. TMX’s December purchase of New York-based data firm VettaFi for more than $1 billion signalled a new direction for one of Canada’s oldest companies. McKenzie thinks TMX can do more than collect fees on public listings in Canada. The VettaFi deal was a bet that TMX can be a global player in data and analytics by leveraging its experience with ETFs, which McKenzie describes as a Canadian invention. 

McKenzie’s boldness extends beyond his bet that he can secure a place in the hyper-competitive U.S. market. In an interview with The Logic, he willingly weighed in on policy—something Bay Street’s elite tend to avoid in public settings. He also discussed Canada’s prospects, how he’s thinking about AI and how public markets could help with the country’s productivity problem. 

This transcript has been edited for clarity and brevity. 

Finance Minister Chrystia Freeland was recently pleading with Canadian businesses to invest more. What is blocking investment, in your view?

I think it’s about uncertainty. Where you will find this the most is anything that’s energy related, both in traditional energy and clean energy and transition. 

[Cenovus] would love to be investing in things like carbon capture and storage, other ways to transition. They have no certainty on the rules. They have no certainty on the credit regime around it. And so how do they go to their own board and say, “I want to invest billions in this,” when there’s no visibility to where they’re going to get a return on it? Energy-sector financing in Canada through the public market, we used to do $20 [billion] to $30 billion a year, both clean and traditional. And last year we did less than $1 billion. It’s been like that year after year. But in the U.S., there’s all kinds of new investment going into the energy sector because they do have certainty that they actually can develop.  

Those are things in the government’s control they can work on: on timing, on red tape, on certainty.  

The other piece that they can do, which we’ve actually recommended for a number of years, is they can incent or de-risk investment. 

We had a Canadian program called flow-through shares. It was used to help build the energy sector. What a flow-through share is, if you’re investing in something that’s going to make losses for a while, because it’s intensive upfront, those losses can flow back to the investors, and they can write them off against other gains. So it makes it easier for the investors to invest in early-stage capital-intensive activities, because they de-risk their investment. They could make it sector specific. If they want to do it in clean energy or other things, it’d be a way to de-risk investment coming in. 

I would like to see their team look at more of those tools that would incent investing, as opposed to telling companies, “We’d like you to invest.”

Where’s the disconnect? 

I’m going to try and not be political, but I think there’s a big gap between announcements and execution. And that’s part of the challenge. They’re good at announcing programs; the strength has not been in the execution, or the clarity around it, for people to participate in [the programs]. And I think you see that in program after program. 

Think about some of the other changes they have brought forward in the last couple of years that have been, I’ll call it populist-based policy. An incremental tax on financial institutions—that doesn’t drive more lending. It doesn’t drive more capital into business. 

The one that we fought back against was the tax on share buybacks. You’ve actually just made it harder for companies to manage their balance sheet with flexibility. If I don’t have the flexibility of doing buybacks, I’m actually just more incented to have a lazy balance sheet and leave capital trapped on it. 

The government view would be, “Well, if I do that, that’s going to incent you to invest more in the business.” But it doesn’t change the business case on the investment. It just makes it more expensive to give that money back to shareholders. 

Who does TMX identify as its stakeholders? 

One of the most important stakeholder groups is the public companies today, but also the private companies that are the public companies of tomorrow, that will rely on the capital markets to raise money to expand, to build, to hire, to invent. The public market is one of the biggest funding sources of that. 

I’m not trying to pick favourite children, but that’s the one that makes the rest of it work. Our other stakeholders are really important in the ecosystem, because it doesn’t work without them. But in terms of who we are trying to help build success for, it’s got to start [with smaller and medium-sized companies].

That is why we’re trying to talk more about tax policy, which is outside where we would historically be. If we can make it easier for a small company to invest in innovation, then we’ll help the ecosystem. 

Tell me more about that. R&D tax credits are a timely topic. 

Governments often will think that public companies are big and successful, and they don’t need help. And so they miss the fact that the bulk of the Canadian public-company ecosystem is actually small and medium enterprises. 

The [SR&ED] tax-credit regime in Ottawa is designed to get [businesses] refundable credits for eligible R&D activities. It’s designed around Canadian private corporations. As soon as a company goes public, no matter what their size, they lose the refundability. It cuts the value of the program. 

We’d love to see reform of the program to put more funding into small companies, regardless of structure. And that’ll get more money actually into innovation and less into consultants. 

TMX seems to have some greater ambitions. What would you like to do and what do you need to happen to help you do it? 

We’re trying to build this into much more of a global information business, without ever losing sight of the fact that the marketplaces we operate are extremely important. One of the ways that we make them long-term sustainable is we actually build this into a larger, more globally minded company with a global client base, able to serve products and services that are not bound by borders. 

We are looking to continue to add much more in terms of information, data and analytics services to make it easier for investors and other intermediaries to make better decisions, and to help them create products that reach a broader investor audience. 

I’m all-in committed to the ETF market. Canadian invention … The very first ETFs, before they were called ETFs, were the Toronto Index Participation Units, back over 30 years ago. That was what eventually became the ETF. We’ve had some of the most innovation in the market as well, because we’ve got some small players in Canada [that are] quite creative. We’ve got a regulatory model that’s actually worked in partnership with them in terms of testing out new products. And that’s why we were first in fixed income. We were first in Bitcoin. We were first in Ether—those types of things. 

The measures of success, the scorekeeping side of it, is we will make the business more of a data business than just a transactional business. When I started here, probably two-thirds to 70 per cent of the revenue was transactions. In the last quarter, it was down to 47 per cent. So we’re actually more a recurring-revenue, subscription-based business than we are transactional. We’re looking to push that to about two-thirds.

How are you incorporating AI into what you’re doing? 

We’ve got a bunch of different test cases, we’ve got a number of people that are working on it. AI, we believe, can facilitate better technology testing; you can iterate a whole lot more. That’s really important in an organization like ours because our systems are so mission critical. The risk of a failure has a cascade impact on everyone else on [Bay] Street. 

I believe there’s potential for all kinds of workflow automation to come out of it. When you think about things like prospectus creation, and all that kind of thing—that can be facilitated by good AI tools. On the flip side, we are anxious about what AI-based trading can do, because that’s even scarier than fat-fingered trading. The regulators are on top of it as well. 

How do you think about the Canadian economy? Where are we headed?

We have a tremendous amount of potential that’s unrealized. We have great innovation. You can see that in the innovation clusters throughout the country. I don’t think we take enough risk to actually scale them up. 

If I bring it back to our sector for a second, we used to have a whole suite of independent dealers in the country that would fund small startup companies, that would backstop their deals to expand. That number has shrunk substantially, because as the markets get more competitive, as regulation gets layered, the capital requirements get layered on, it’s just harder for them to do business. And the part of the business that they could do business on, the wealth side, went to the banks. The banks don’t provide that kind of equity support to small-cap businesses. The risk culture is not there to do it, because the opportunities aren’t big enough for the amount of compliance work that they’ve got. 

So thinking about how we actually reinvest in the risk culture of the country is going to be a big piece of unlocking that advantage. Quebec used to have a Quebec savings plan program that created a tax incentive for retail investors to invest in local Quebec companies. We could absolutely do that at a national level. We have the capital. The capital stock is there and the innovations are there. How do we spur that risk-taking investment in the country again and the pride in the successes?  

Is it cultural? Some people say that. We’re just not conditioned to be productive and take risks. 

I believe so, but it doesn’t mean we can’t change that and can’t incent it. 

In the short term, I do worry that we’re not at the end of this rough spot. The interest-rate impact, even if they start to come down, we haven’t fully felt it yet.

Tell me more about that. 

You still have two to three years of mortgage renewals that haven’t happened yet that are going to take money out of the economy. That’s just the simple economics on it. On the corporate side it’s largely baked in, so when we start to see rates coming down, it will actually unlock investment again. It will improve valuations. Companies will raise money. But on the consumer spend side we’re not there yet.

Let’s end this on a positive note. What’s Canada’s strength? What should we lean into?

We have the best developed small-cap, publicly funded ecosystem in the world. It was built out of the mining sector, because that actually was our frontier sector for so many generations. But nowhere else in the world do we actually have public markets, banks, lawyers, analysts, the whole ecosystem that can support a small company raising money, growing through its lifecycle and maturing the way it’s done in Canada. Many countries have tried to copy it and none have been successful. That’s why I try to keep re-educating the government on it. This is potential to realize, if you understand what’s there, we could turbocharge it to do more.

When other markets have tried to do it, they’re nowhere near as good. The U.S. is over-regulated. They can’t do it. They’re regulated for big companies, so they can’t do it for small companies. Other regions have tried. And again, they haven’t had the rest of the ecosystem around it because it can’t be just the exchange. It’s got to be regulators and deal makers and risk capital providers. So I do believe we have something special there that could be an engine for growth.