Merger of Equals: Bats and Direct Edge Hook Up

Terry Flanagan

The merger of Bats Global Markets and Direct Edge is being viewed as an opportunity to grab market share and rationalize the cost base at a time when equities exchanges are under pressure to show competitive differentiation.

“We expected this,” said Joe Saluzzi, principal of Themis Trading. “While the merger of the companies may help reduce their expenses, it does nothing to reduce market fragmentation, which is the number one problem with our market structure today.”

Bats currently has a 10 percent market share, and Direct Edge has 11 percent, so the combined entity would replace Nasdaq OMX (18 percent) at the number two spot among U.S. equities exchanges, and only two percent behind the leader, NYSE Euronext, which itself is merging with IntercontinentalExchange.

Given the turmoil surrounding the Nasdaq blowup last week, it’s conceivable that Bats/Direct Edge could chip away further at Nasdaq’s market share, and become the primary competitor for U.S. listings to NYSE Euronext.

“This agreement is an important milestone for the U.S. equities market and other markets around the globe as it will combine two organizations that have been innovative in creating a more competitive marketplace to benefit all investors,” said Bats CEO Joe Ratterman.

Joe Ratterman, Bats Global Markets

Joe Ratterman, Bats Global Markets

The listings side of the exchange business is no longer the main revenue driver, however. Clearing, co-location, market data, matching engine technology, and other business lines have become increasingly important to the exchange business model.

Indeed, one of the primary motivators for ICE’s takeover of NYSE was not its equities listing business, but its NYSE Liffe derivatives business.

ICE Clear Europe and NYSE Liffe have completed the clearing transition for the London-based derivatives market of NYSE Liffe to ICE Clear Europe.

In just under five years, ICE Clear Europe has launched hundreds of new products and become a leading multi-asset clearing house in Europe, clearing more than 3 million contracts daily.

Following the migration of clearing for NYSE Liffe products, ICE Clear Europe provides clearing services for energy, emissions, agricultural, credit, interest rate, fixed income and equity derivatives. ICE Clear Europe currently has 80 members and is on track to be compliant with the European Market Infrastructure Regulation in the second half of 2013.

CME Group is creating a London-based derivatives exchange, CME Europe, which will initially begin trading foreign exchange futures products and is expected to launch shortly.

Eurex Exchange, beginning in October 2013, will provide FX derivatives as exchange-listed products. It will initially offer futures and options on the following currency pairs: EUR/USD, EUR/GBP, EUR/CHF, GBP/USD, GBP/CHF and USD/CHF. The majority of over-the-counter, daily FX derivatives trading take place in these currency pairs.

“It looks like we are going to see a few more spats as the big boys vie for control over the European exchange-traded derivatives market,” said Steve Grob, head of strategy at Fidessa Group, in a blog posting. “The CME is looking to launch its own competitive products to Eurex, and Nasdaq NLX is taking on both NYSE Liffe and Eurex with its own interest rate products.”

Direct Edge has made a concerted push around data, which has become a pillar of exchange revenue.

EdgeBook Depth, a product providing full depth-of-book information from Direct Edge’s EDGA and EDGX exchanges, is now available through Interactive Data’s consolidated feed.

EDGA and EDGX together serve as the transaction venue for more than 11 percent of U.S. cash equities trading and comprise the top exchange destination for retail order flow from the largest discount brokerage houses.

One innovation in data that Direct Edge has introduced is its quote attribution functionality, which includes the Edge Attribution Incentive Program, designed to reward members for providing Direct Edge exchanges with valuable data and increased transparency for investors.

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