04.05.2018
By Rob Daly

ICE Bids For Chicago Stock Exchange

The saga of the Chicago Stock Exchange acquisition moved toward a close when the Intercontinental Exchange announced its plan to purchase the privately held bourse for an undisclosed sum on April 5.

The transaction would mark ICE’s second purchase of a small U.S. equity exchange in 16 months– it bought the National Stock Exchange from the then CBOE Holdings in December 2016– as well as its fifth exchange medallion.

The exchange operators declined to comment beyond a statement regarding ICE’s intention to keep the CHX operating as a securities exchange but on NYSE’s Pillar architecture and from the ICE’s data center at 350 East Cermak Ave. in Chicago.

Industry watchers doubt that ICE will keep operating the CHX under its existing business model once the transaction closes, which is expected to happen this quarter pending approval by the US Securities and Exchange Commission.

The Chicago bourse generates most of its income from SIP tape-sharing revenue, according to Doug Clark, head of Americas market structure at agency brokerage ITG.

“Looking at the Consolidated Tape Association’s reports, the CHX makes ten times the revenue from pre-trade quoting activities than from the trading activities,” Clark said. “No one else has a ratio even close to that. The second largest is Nasdaq PSX, which has a ratio of 4:1, but most markets are well below 2:1 in pre-trade versus actual trade data revenue.”

However, the geography plays a huge part in attracting liquidity.

“From a latency perspective, it is hard to send an order to the CHX and find out you did not get a fill because things changed during the 6 or 7 milliseconds that it takes an order to get there,” said Clark.

The CHX attempted to remedy the situation last year by implementing a speed bump that would permit liquidity providers to quote more aggressively only to have the SEC approve then rescind its approval in October 2017.

“That made the outlook for the CHX a little less exciting,” he noted.

Clark speculated that ICE plans to purchase the exchange so that it could break into the inverted-fee market, which represents approximately 10% of the total trading volume.

“They are not participating in it at all,” he said. “If they want to compete with Cboe Global Markets and Nasdaq, it will need to have something in that subset,” he said.

If the ICE expects to experiment with fee schedules, it will need to do it in short order as the SEC’s proposed access-fee pilot moves closer to reality.

Another option ICE could pursue is to move the CHX’s matching engine to its Mahwah, NJ data center, which would eliminate the message latency issue and possibly lead to brokers moving the CHX higher on their order routing tables.

“It doesn’t make sense to host it in Chicago unless you look just to quote and not trade,” said Clark.

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