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: Quote, Profile, Research) 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.