Exchange operators BATS Global Markets and Direct Edge Holdings have announced plans to merge. The unpriced union would create the second-largest US stock exchange operator after NYSE Euronext (NYX).
The stock trading business has been in decline since early 2010, with uncertainty over the global economy pushing retail investors to the sidelines and low market volatility impacting on volumes.
Exchange operators have been seeking new sources of revenue, including in areas of market data and technology, while also considering potential mergers to create scale and reduce costs.
The deal follows NYX’s provisional acceptance last December of a US$8.2bn takeover bid from Intercontinental Exchange (ICE) with the eventual possibility of Euronext perhaps being hived off in the future to help pay for it. The deal has since been re-valued this year at around US$10.6bn and received clearance in June 2013 from the European Commission.
Reports suggest that BATS and Direct Edge have discussed a possible merger several times before, but the valuation of Direct Edge proved an obstacle. No financial details of the proposed link-up have been released but an agreement is presumed to have been reached. Doubts over the future of BATS emerged after a planned initial public offering (IPO) last March was abandoned due to technical problems and the declining volumes and profits in the traditional trading venue arena.
The proposed deal is expected to close in the first half of 2014 subject to the usual regulatory approvals. The new company, to be headquartered in the Kansas City area, US, will overtake Nasdaq OMX Group as the second-largest US equities exchange.
Commenting on the deal BATS’ chief executive officer (CEO), Joe Ratterman, who will be the CEO of the combined company with Direct Edge’s CEO, Bill O'Brien, as its president, said: "This agreement is an important milestone for the US equities market and other markets around the globe as it will combine two organisations that have been innovative in creating a more competitive marketplace to benefit all investors."
Direct Edge is owned by a consortium comprising of the International Securities Exchange, Citadel, KCG and Goldman Sachs. It had talks last year about a possible takeover by Canada's TMX Group.
Both firms operate two US stock exchanges and the combined BATS-Direct Edge entity will continue to operate all four exchanges, running on BATS' technology if the deal is completed. BATS also runs a US equity options market, as well as BATS Chi-X Europe, the largest pan-European equities exchange by market share and value traded.