TMX Group, the operator of the Toronto Stock Exchange, delivered forecast-beating quarterly results on Friday as it prepares for regulatory reviews of its $3 billion plan to join forces with the London Stock Exchange.

Revenue for TMX, which also operates the TSX Venture Exchange for small-capitalization companies and the Montreal Exchange derivatives market, rose 17 percent in the first quarter, thanks to record trading volume and robust equity financing activity.

The gain, which followed a quarter in which revenue slipped, bodes well for the company as it battles growing competition from Alpha Group and other alternative trading venues, which have steadily eroded its once dominant market share.

Net income climbed to C$64.3 million ($66.8 million), or 84 Canadian cents a share, up from C$56.7 million, or 77 Canadian cents, a year earlier. Profit in the latest quarter included an C$8.3 million merger related charge.

On an adjusted basis, TMX earned 97 Canadian cents a share, compared with 77 Canadian cents, a year earlier.

I, along with maybe one or two others were already on the high end of Street estimates and they exceeded our estimates by a country mile, said National Bank Financial analyst Shubha Kahn, who was looking for earnings of 90 Canadian cents a share.

Revenue came in at C$174.7 million, up from C$149.4 million a year ago.

PROVINCIAL APPLICATIONS

The two exchanges on Friday filed applications with four Canadian provincial securities commissions for approval of their proposed combination. Ontario, Quebec, Alberta and British Columbia will have a say on the deal, as will the federal government.

The applications initiate a formal process that could last for months. The deal between the exchanges was announced in February 9.

The Ontario Securities Commission initiated the public process after the filing, which includes a notice and 45-day comment period, with a hearing likely in mid- to late July 2011.

The would-be partners have championed the deal as an opportunity to create a transatlantic exchange and powerhouse in mining and resource equity, doing $4 trillion in annual trading. Canadian critics are concerned that control of a national institution will fall into the foreign hands.

We have made this investment because we are convinced this merger represents an unparalleled opportunity for our company, Chief Executive Tom Kloet said on Friday.

Total financing for the TSX rose 18 percent from the first three months in 2010, and 97 percent for the TSX Venture Exchange. Trading volumes also rose 20 percent on the TSX and 64 percent on the Venture Exchange.

All told, there were 91 new listings in the first three months of 2011, including 67 initial public offerings.

MARKET SHARE EROSION

Even though trading volume improved during the quarter, alternative trading platforms still present a formidable competitive threat.

The TSX and TSX Venture Exchange had a combined market share of about 65 percent by value traded during the quarter, and a combined market share of 68.8 percent by volume traded. Overall combined market share was down slightly quarter over quarter.

Going forward, there is a bit of a headwind in terms of market share erosion. ... It'll temper some of the outperformance relative to Street estimates, said Khan.

To gain an edge, TMX is in the process of launching its own alternative trading system, TMX Select. It also reduced fees and introduced rebates for certain services, and it launched services that allow for anonymous trading.

If those initiatives bear fruit, it should offset some of the market share erosion, or at least stem some of the market share losses, said Khan.

The LSE also reported results on Friday that handily beat analysts forecasts, with profit up 22 percent to 341 million pounds ($555.5 million).

Like the TMX, the British exchange has also seen its share of domestic equities trading slump in the past three years due to competition from the likes of Chi-X Europe and Bats Europe.

TMX shares were up 12 Canadian cents at C$41.12 at midday on Friday, an implied premium relative to LSE's offer of $39.75, according to a CIBC research note.

($1 = 0.962 Canadian Dollars)

(Additional reporting by Bhaswati Mukhopadhyay in Bangalore; Editing by Frank McGurty)

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