09.23.2016
By Terry Flanagan

CBOE-Bats Merger Report: All About Scale

CBOE Holdings’ reported talks to acquire Bats Global Markets would be the latest in a long line of exchange tie-ups, with one common denominator: the drive to have more trades execute under the same roof.

“Exchanges are a scale game,” said Brad Bailey, research director at Celent’s securities and investments practice. “Running exchanges in a regulatory, market-structure-complex world is tough. There is tremendous operational leverage available to bigger, more complex exchanges.”

Yesterday, Bloomberg News reported merger talks between CBOE and Bats, citing people familiar with the situation. A deal could be announced within weeks, thought it still may not happen, according to the report.

Market participants bought into the report, as Bats shares surged about 20% as of late morning Friday. Spokespersons for CBOE and Bats declined to comment to Markets Media on Friday morning.

CBOE’s eponymous options exchange is the largest of 14 in the U.S., with market share of 26.5% this month, according to OCC data. Chicago-based CBOE has a virtual stranglehold in the index-options business via its dominant CBOE Volatility Index (VIX) product.

Bats, which purchased rival exchange operator Direct Edge in 2014 and itself went public earlier this year, runs the BZX and EDGX options exchanges, which have a combined market share of about 12%. Bats also operates four of the 13 U.S. equity exchanges, with a combined market share of about 20%.

Equity and options exchange operator Nasdaq bought options bourse International Securities Exchange earlier this year. In the equities space, IntercontinentalExchange bought New York Stock Exchange in 2013. In Europe, Deutsche Boerse and London Stock Exchange are planning to merge. And there have been a host of exchange mergers over the past half-decade that have been discussed or proposed but ultimately didn’t happen.

“Think about the size and scale across asset classes of most exchanges,” Bailey told Markets Media. “ICE gobbled up NYSE, DB/LSE are attempting a marriage despite the complexities that Brexit has added to that equation.”

“The U.S. options market has ‘reconsolidated’ since Nasdaq’s acquisition of ISE,” Bailey continued. “Bats and CBOE are both very impressive exchanges — Bats has been a leader in market-structure evolution and technology prowess, and CBOE has important IP benefits.”

Kevin McPartland, head of market structure and technology research at Greenwich Associates said that more exchange consolidation isn’t surprising, but the specific tie-up is interesting. “The combination of Bats and CBOE would create a strong force in equities and options, and give each more resources to build out other business like FX and futures.”

With reporting by Rob Daly

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