BAY STREET-TMX faces loss of more market share to new rivals

* TMX market share 84 percent in 3rd quarter

* Alpha says can achieve 30-40 pct share in two years

* Regulation a wild card in market share outlook

By Jennifer Kwan

TORONTO, Nov 8 (Reuters) - Upstart rivals are set to take a still bigger bite out of TMX Group Inc's (X.TO) share of the Canadian stock trading market in coming months as competition heats up over pricing, product and technology.

Dominant exchange operator TMX, which runs the Toronto Stock Exchange, the small-cap TSX Venture Exchange and Montreal derivatives market, had market share of 84 percent in the third quarter, down from around 98 percent a year earlier.

"Liquidity is a funny thing. Once you start losing it it's pretty hard to get back. We've certainly seen that in the U.S. market over the last 10 years," said Sang Lee, partner at Aite Group, a research advisory firm in Boston.

"The tipping point seems to be when a dominant (exchange) goes below that 80 percent mark. The decline after that tends to be accelerated."

Most industry watchers attribute TMX's rapid market share erosion to Alpha Group, the latest of six alternative stock trading systems (ATSs) to sprout up in Canada in recent years. Alpha is owned in part by the investment dealer arms of Canada's big banks.

Jos Schmitt, chief executive of Alpha, said at the launch of his ATS last November that it would win 20 percent of stock trading market share in Canada within a year.

Early on, that goal looked impossible, but Alpha briefly pierced the 20 percent threshold for the first time this summer and Schmitt said it is now focusing aggressively on how it can win more.

"Once we hit the 20 percent market share target we have to continue to grow and move toward 30 and 40 percent. That is the potential that is ahead of us," he said in a recent interview at his downtown Toronto office. He added that goal could be achieved in two years.

WHO'S GOT THE EDGE

Pricing cuts by Alpha have been a key catalyst for its market-share climb. Future pricing tweaks, as well as specialized services and technology upgrades will make the alternative venues more competitive in coming months, said Doug Clark, managing director of quantitative execution services at BMO Capital Markets.

"In the next 12 months you're going to see who the winners and losers are going to be, and we're going to see a couple of the less successful marketplaces disappear," Clark said.

Most industry watchers believe the TMX may lose more market share, but note that those losses come as volumes are rising.