Bats Chi-X Deal Faces Little Opposition

Terry Flanagan

European rival the London Stock Exchange expressed little resistance toward the proposed merger, stating that it would affect its own business strategy, regardless of if the deal is completed or not.

“The LSE did not consider that the proposed merger would result in increased or decreased prices,” said the London exchange operator during its testimony in front of the U.K. Competition Commission in July. “If the proposed merger completed or not, both the LSE’s and Turquoise’s strategy would be to compete and grow.”

“LSE did buy Turquoise, so it operates its own (multilateral trading facility),” said Michael Wong, exchange analyst with Morningstar. “So they would not be opposed to anything that’s pro MTS in Europe. The LSE is also the incumbent that’s already lost a lot of market share from MTS’s, so it potentially doesn’t have that much to lose anymore. Other exchanges have more to lose than LSE.”

In addition, LSE added that should the merger create any type of competitive imbalance, it could be rectified through the creation of new MTFs.

“(Markets in Financial Instruments Directive) had increased competition and facilitated the introduction of MTFs,” said the LSE. “This was a dynamic pan-European marketplace that was highly competitive with low barriers to entry. Should the merger cause any competitive concerns, then a new MTF could rapidly be established to restore competition.”

The contents of the LSE’s testimony, as well as the testimony of other related entities and interested parties were released earlier in the month.

Chicago’s Getco, a shareholder of both Bats and Chi-X, was supportive of the merger, stating that it would make better use of technology and be better able to compete with the larger, incumbent exchanges, such as the LSE.

The commission is expected to have a decision regarding the merger in December.

The move by Bats in February to acquire Chi-X Europe came in the midst of a wave of proposed exchange mergers and acquisitions, Deutsche Borse’s deal to merge with NYSE Euronext announced just days before. The London Stock Exchange’s attempt to buy Canada’s TMX Group was announced a week earlier, before it was dropped in June when it ultimately failed to gain the requisite shareholder support. The Singapore Stock Exchange’s bid to acquire trans-Pacific counterpart the Australian Stock Exchange, which was announced in late 2010, failed as well after it failed to gain regulatory approval.

“Many exchange mergers have already been scuttled this year” said Wong. “If this Chi-X Bats merger goes through, it may be a more positive sign for NYSE-Deutsche Borse, and maybe give greater hope for cross-border exchange mergers, which has been lacking since the Australian Stock Exchange-Singapore Exchange and TMX Group-LSE merger.”

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