The Case for the CSX Acquisition


Connecting with China to Strengthen America: Benefits of the Chicago Stock Exchange Acquisition
Part One: Market Structure

By Anthony Saliba, Board Member, Chicago Stock Exchange

You’ve probably heard of this financial acquisition — the ratio of media mentions to deal value has been extreme since it was announced early last year. This is a relatively small deal and it’s getting all sorts of media attention because Chinese entities are involved.

The anticipated acquisition I refer to is that of the Chicago Stock Exchange (CHX), an old and venerable, yet small, national U.S. equity exchange being purchased by a buyers group of which I am part. Some of my fellow shareholders-to-be are private Chinese companies, some are American.

Anthony Saliba

It’s easy to throw stones at this. It’s easy to challenge the efficacy. And it’s easy to sensationalize. For example, a headline and article from CNN does just that: “China Clears Key Hurdle to Buy Chicago Stock Exchange”. To be clear, “China” is not buying anything. The investment group is led by Chongqing Casin Enterprise Group, a private company with no ties to the government. Deals with foreign entities should certainly not occur without governmental due diligence, but concerns that Casin is an actor controlled by the Chinese government have been researched, vetted and debunked by the Committee on Foreign Investment in the United States (CFIUS).

To move beyond the scare tactics of those who don’t want to see this agreement approved, and as a member of the investment group and a member of the board of directors of the exchange, I want to shed some light on the deal and explain some of its benefits. I believe the acquisition will have positive effects in the national market structure, the city of Chicago and the U.S. economy as a whole. My initial comments will focus on the markets, and later I will also cover the other areas in future posts. (I’ll link to those posts here once uploaded.)

To start, here a few facts about the proposed transaction:

  • About a year ago, the exchange agreed to be acquired by our multinational group, which consists of both American and Chinese investors. We see this as an opportunity to form a strong partnership between the world’s two largest economies, and it is an opportunity for CHX to strategically expand its footprint here and abroad.
  • The exchange will still be majority American-owned, and will have an independent board of directors.
  • Last fall, the exchange submitted a voluntary submission to CFIUS, the government body responsible for reviewing the national security implications of outside investments in the U.S. In December, CFIUS concluded that there are “no unresolved national security concerns” with the transaction.
  • The deal is currently being reviewed by the Securities and Exchange Commission as well.

During my nearly 40 years as a professional in the securities industry I have collaborated with exchanges and trading entities in over 20 countries. As a board member at CHX, I have had an inside view of how the exchange staff have worked to create better markets. I’m proud to be part of the new ownership group.

CHX currently has some of the most innovative ideas in the industry to promote fairness in the markets. This acquisition will breathe vital working capital into the exchange, allowing CHX to invest further in improving market structure.

To give you an idea, here are a few of the improvements:

Last year, the exchange introduced SNAP, on-demand auctions that level the playing field for traders by executing trades based on the best price, rather than the fastest speed. These auctions take place “in the dark” to minimize information leakage, yet — unlike dark pools — offer the safety of a fully-regulated exchange. SNAP auctions are already available, but would expand much further with the investment our ownership group brings.

Another initiative, Liquidity Taking Access Delay (LTAD), is currently under review with the SEC. LTAD is a speed bump designed specifically to protect displayed liquidity. The delay applies equally to all liquidity-taking orders, protecting investors from latency arbitrage and allowing for liquidity providers to create tighter and deeper markets in a safer manner.

The capital from the acquisition will also allow CHX to pursue additional new initiatives and further invest in the ones listed above. For example, the exchange will be able to follow through on its plans to establish a second book. The second book will bring an innovative trading model to the marketplace and offer an alternative venue to execute to the buy side, thereby creating more choices for investors.

Perhaps the biggest initiative, though, is a listing program for JOBS Act companies; medium and small businesses. These companies will gain access to capital via an avenue that currently doesn’t exist, and their investors will be protected by going through an SEC regulated exchange — something that is often not the case today. Most importantly, this program will create new opportunities for main street investors, who tend to miss out on the upside when established, larger companies IPO on NYSE.

Our market system — and really, our nation — is based on the philosophy that competition is best for all involved. This acquisition will give CHX a foothold to seriously compete as a securities exchange. CHX does not command a large market share today, but it is unique in its independence — almost all of the other exchanges are owned by NYSE or Nasdaq. (Or in the case of Bats, by CBOE.) If CHX can get the funding it needs to launch its planned initiatives and compete with the giants in the field, all other exchanges would be incentivized to improve as well. And all market participants would reap the benefits.

My next post will focus on how this deal will benefit the city of Chicago.

The views herein are those of Anthony Saliba and do not necessarily reflect those of the CHX Holdings Inc., Chongqing Casin Enterprise Group, or any other persons or entity.

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