As a native Torontonian, I don't know how it started, but in recent years T.O (or even T-dot) has been the short-form or nickname for Toronto. I'm pretty sure it's not derived from the first and last letter of Toronto, but rather the first two letters: TOronto.
It MIGHT come from the postal/travel acronym for the city (ie. TO = Toronto, MT = Montreal), but again I'm not sure (MT is rarely used as a nickname for Montreal). I'm assuming the nickname "T O" just grew out of the city getting hipper and trendier and more popular over the years, and people were just looking for hip nicknames.
I find myself frequently saying, "I'm from the T-Dot."
BlueWizard's blog: The Rambling Corner
HEDWIG: "The road is my home. In reflecting upon the people whom I have come upon in my travels, I cannot help but think of the people who have come upon me."