CBOE, VIX Proprietor, to Buy Tech-Focused Bats

Terry Flanagan

CBOE Holdings agreed to buy Bats Global Markets, in a move that combines one exchange operator known for its product development with another that’s known for its technology.

“The acquisition of Bats is expected to strengthen our position as a global leader in innovative tradable products and services, and is a transformative next step in our growth strategy,” CBOE Chief Executive Officer Ed Tilly said in a release. “We believe that bringing together CBOE Holdings’ product innovation, indexing expertise, and options and volatility market position, with Bats’ proven proprietary technology infrastructure, global ETP listing and trading venues, global foreign exchange marketplace and market data services, represents a compelling combination that should deliver significant benefits for our customers.”

CBOE’s eponymous options exchange is the largest of 14 in the U.S., with market share of 26.4% 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. The exchange operator also runs the C2 all-electronic options exchange and the CBOE Futures Exchange.

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%.

Exchanges have become de facto technology companies as electronic markets have quickened and grown more complex, and many market participants consider Bats’s software and trading technology as the industry standard. In a 2014 interview with Markets Media, Bats Chief Information Officer Chris Isaacson said the exchange operator is focused on providing customers with low latency, high reliability and increased functionality, at low cost.

Jamie Selway, managing director and head of execution services at ITG told Markets Media in an interview that the deal announcement makes sense as CBOE had been looking for an independent path, rather than be swallowed up by CME Group or another larger rival as market participants have long considered a possibility.

“Given CBOE’s size relative to other exchanges there had been speculation that they might eventually be acquired,” Selway said. “In addition to increasing their size, a Bats acquisition offers CBOE a technological upgrade and also broadens out their product set by adding European and U.S. equities, additional scale in the options business and an FX capability via the Bats Hotspot platform.”

On a conference call this morning, Tilly said the “move to the proven, high-speed, low-cost technology that Bats has been disrupting the marketplace with” will roll out to the CBOE Futures Exchange first, and then to CBOE’s options venues “over a few years.”

Regarding the rationale for the transaction, Tilly said CBOE saw Bats as a way to add to growth that the company was already accomplishing organically. Around the time of Bats’ initial public offering in April, CBOE saw “what an incredible business they are in how they are executing as a disruptor by bringing to the marketplace low costs and an extremely robust system.”

With Bats, Tilly told analysts that with economies of scale in place, the combined firms can exploit synergies and allow CBOE to grow its index business, expand into other asset classes  -such as foreign exchange, tap into the European trading markets where Bats has already established a presence and gain access into the lucrative market data business.

Additionally, the combination of asset classes of the two exchange operators is “terrific,” with little overlap, Tilly said.

ITG’s Selway also expected the merger of the two to also strengthen the leadership team at CBOE as they plan to keep Bats CEO Chris Concannon on as president of the combined firm. Concannon “has a lot of credibility in the industry,” said Selway.

Tilly also said the combined firm would be headquartered in Chicago and that while staff reductions often a byproduct of mergers, CBOE wanted to bring jobs to the Chicago area and planned to keep its trading floor open.

“The trading floor still has utility an offers customers value,” Tilly said. And with regards to trading, he added that Bats current pricing models employed at its multiple trading venues would remain intact.

In order to help fund the acquisition, Tilly also told analysts that CBOE would temporarily suspend its ongoing stock repurchase plan but hoped to resume buyback operations “fairly quickly.”

“And we’re still open to more M&A opportunities if it complements CBOE’s business model,” Tilly concluded.

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