01.12.2012
By Terry Flanagan

On Deck for Bats Europe

As it puts the finishing touches on its integration with Chi-X Europe, Bats Europe launches new functionality for investors.

Bats Chi-X Europe, the largest pan-European equities trading venue by market share, has introduced a new four-way interoperable clearing service, giving customers a choice of clearing counterparties that best suit their needs.

The cost of clearing in Europe is much higher than in the U.S. (about 10x higher in 2008). One of the main reasons for the high cost is that Europe has several clearing counterparties, or CCPs, and each trading venue designated a CCP for clearing trades executed on its venue. For participants trading pan-European equities, this model is highly inefficient because they have to establish separate clearing relationships for each venue on which they trade, whereas in the U.S., firms have only one clearing relationship with the DTCC.

“We saw clearing interoperability, which is the ability of CCPs to connect to each other, as a more efficient clearing model,” a market participant familiar with the matter told Markets Media. “Interoperability allows trading venues to offer customers a choice of multiple CCPs so that they can choose the CCP that best fits their needs and benefit from netting the cost of clearing by consolidating their trading activity to one or two CCPs, rather than multiple. This also creates an environment where CCPs must compete for business based on pricing, service, and innovation, all of which will benefit market participants.”

Bats executives have declined to comment on the matter, citing their IPO “quiet period.”

Since going live on Jan. 6, the clearing interoperability service has gone on without a hitch.

The offering of four-way clearing is part of a larger growth strategy for Bats Chi-X Europe. The service will help to drive down post-trade costs for market participants, which has been its goal since it first went live in the U.S. in 2005. Both BATS Europe and Chi-X Europe launched with highly aggressive pricing, and the incumbent exchanges responded to this competition by lowering their fees.

Bats Global Markets’ acquisition of Chi-X Europe also closed in December. The combined entity represents about a quarter of all European equities trading.

The technology integration process is expected to last several months, to be completed by April 30. Once the integration is complete, the Bats and Chi-X Europe lit and dark order books will continue be operated separately.

The acquisition of Chi-X Europe was announced in February 2011. Bats then announced in May its plans to go public in a $100 million initial public offering. Initially slated for late 2011, the IPO is now expected to occur in early 2012 as the company awaits the integration with Chi-X Europe. U.S. regulators in August gave approval for Bats to start listing shares, allowing the Kansas City-based trading platform to compete directly with exchange operators NYSE Euronext and Nasdaq OMX.

In a regulatory filing with the Securities and Exchange Commission in November, Bats said that it would rack up in excess of $9 million in costs under its acquisition of Chi-X Europe. Among them are fees to be paid to advisors, including lawyers and accountants as well as for retaining staff.

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