The merger of Bats Global Markets and Direct Edge, which was completed Monday, marks a transition in the traditional exchange business model. Whereas exchanges once derived a good chunk of their revenues from fees linked to their listing, trading and related services, with market information and clearing and settlement providing ancillary sources of revenue, the situation has now reversed, to the point where the exchange listing business is no longer profitable in and of itself.

“This [Bats-Direct Edge] may represent a new revenue model,” said Thomas Caldwell, CEO of Caldwell Investment Management. “When I look at U.S. capital market structure, it’s a bundle of unintended consequences, starting with Reg NMS and everything being fragmented. There is no money to be made in cash equities. The NYSE being taken over by Ice shows that the money is in sticky products such as commodities. It’s hard to get a lot of volume onto your particular exchange unless the listings must trade on your venue or if you have a clearing mechanism like CME or CBOE.”

Direct Edge has made a concerted push around data, which has become a pillar of exchange revenue. EdgeBook Depth, a product providing full depth-of-book information from Direct Edge’s EDGA and EDGX exchanges, is available through Interactive Data’s consolidated feed.

One innovation in data that Direct Edge has introduced is its quote attribution functionality, which includes the Edge Attribution Incentive Program, designed to reward members for providing Direct Edge exchanges with valuable data and increased transparency for investors.

“In the end, execution costs have come down considerably as the competition across venues with regards to rebates/fee schedules have competed fiercely on price – down even a hundred of a penny or less – in order to attract significant flows, and this has resulted in lower costs passed on to from executing brokers to the online firms, and in some cases the online brokerages to their end-user traders,” said Steven Hatzakis, an independent Commodity Trading Advisor, in a blog posting.

“For BATS and Direct Edge this model appears to have worked well, and other such exchanges have also shifted to adjust their respective fee schedules in recent years as this pricing model emerged,” he said.

In January, combined U.S. market share of the BATS and Direct Edge exchanges reached 20.54% compared to U.S. exchanges operated by NYSE Euronext (20.58%) and Nasdaq OMX (20.02%). In
Europe, BATS again finished January as the largest stock exchange with market share of 22.11%. The combined company, which will operate under the BATS Global Markets brand, is the #1 US
exchange operator by market share for all exchange-traded funds as well as the top exchange for retail driven liquidity, according to most recent data.

“Completion of the merger creates an even stronger competitor and advocate for the benefit of all market participants,” said Bats CEO Joe Ratterman. “With the Direct Edge team, we are excited to embark on a new path to deliver even greater innovation and competition, challenging the status quo globally.”

Direct Edge CEO William O’Brien added: “With a focus on customers, we have designed the combined company to deliver meaningful value through preservation of choice, reduced costs and technological compatibility. Our products and approach make BATS a true partner with our customers, and position us to further expand our services and relationships to benefit traders, investors and issuers.”

The company has unveiled bats.com/edgeintegration, a dedicated website for its forthcoming technology integration involving the transition of the Direct Edge equities exchanges to the proprietary BATS technology platform.