02.28.2018
By John D'Antona

CHX to Regroup After Nixed Acquisition

It’s back to the drawing board for the Chicago Stock Exchange.

How can it secure its future with 0.2% of total U.S. daily equity trading volume?

Just two weeks ago the Securities and Exchange Commission overturned an internal and lower working group’s recommendation to allow the Windy City exchange to be acquire by an investor’s group that include several Chinese companies. The CHX had tried for two years to complete the deal – lobbying local and Federal officials, meeting with regulators and even tinkering with the composition of the bidding group.

So, what should the CHX do now?

“They’ve got to do something different,” Jim Angel, a finance professor at Georgetown University, said in an interview with S&P Global Intelligence. “They can’t really survive on a business-as-usual basis.”

James Angel, Georgetown University

With less than 1% of U.S. equity market share, the Chicago Stock Exchange, despite technology initiatives, including its own version of a speed bump, designed to boost business and market share, have failed to make a dent in the exchange space. Cboe Global Markets, NYSE, Nasdaq and even upstart IEX all have firmly planted roots in the equity markets.

The bid had represented a chance for the Chicago Stock Exchange to become an initial public offerings hub for Chinese companies, potentially cementing its specialization, S&P noted. But with it now blocked, the exchange may look to double down by fighting the SEC’s decision in the courts.

In a blog post, the CHX said it was disappointed with the SEC’s decision to overrule its own staff’s recommendation in rejecting the acquisition of CHX by a majority American investor group led by North American Casin Holdings, Inc. The disapproval order of February 15, 2018, contains logic and representations with which CHX strongly disagrees.

“By disapproving the transaction, the SEC has denied the American public an historic and unprecedented opportunity to build a mutually beneficial economic bridge between the world’s largest economies, while unfairly disadvantaging our company and shareholders.The CHX board and executive team are currently evaluating their options. Despite the SEC’s decision, CHX remains committed to increasing shareholder value and continuing to promote needed competition and innovation in the U.S. equity markets,” the blog said.

It continued:

“CHX notes that one of its innovative proposals, the Liquidity Enhancing Access Delay (“LEAD”), is also under review by the Commissioners. Like the transaction proposal, after months of careful consideration, the LEAD proposal was approved by the SEC staff as a two-year pilot program. The purpose of the LEAD pilot is to provide the SEC, CHX and the public with empirical data that could be used to evaluate the effectiveness of LEAD in enhancing the quality of our markets. Notwithstanding that, the Commission is now reviewing the delegated action, which CHX believes violates the Exchange Act, as well as the SEC’s own Rules of Practice. We sincerely hope that the Commissioners choose to affirm their staff’s recommendation with respect to LEAD and reaffirm Chair Jay Clayton’s commitment to a “thoughtful and methodical, data driven approach to market structure.”

There has been no further comment from the exchange.

Now that regulators struck down the China-tied bid, the Chicago Stock Exchange will likely see an influx of interest, including from rival stock exchange operators like IEX Services LLC and Canada-based TMX Group Ltd.., which operates the Toronto Stock Exchange, Georgetown’s Angel told S&P. An acquisition of the Chicago trading venue could provide IEX or TMX with a chance to expand through another venue or to try out new trading structures.

Despite its size, the Chicago Stock Exchange will also draw interest from other companies such as private equity companies, Healthy Markets Association Executive Director Tyler Gellasch said in an interview.

The exchange operator’s exchange license, a classification for national market exchanges that is acquired from the SEC through a lengthy and difficult process, could become a key selling point for some companies, Gellasch said.

“It’s not unlike someone buying a storefront with a good location and a nice kitchen in the back,” he said.

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