Bloomberg News

Stock Exchange Owner Direct Edge Studies Capital Market Options

January 29, 2012

Jan. 28 (Bloomberg) -- Direct Edge Holdings LLC, the Jersey City, New Jersey-based exchange owner whose platforms make it the fourth-biggest U.S. equities exchange operator, is studying options in capital markets, its chief executive officer said.

Direct Edge is exploring “capital market alternatives,” CEO William O’Brien said in a telephone interview. The company hired Wells Fargo & Co. and Bank of America Corp., the Wall Street Journal reported, citing unidentified people. O’Brien declined to comment on the story. Direct Edge is 31.5 percent owned by Deutsche Boerse AG and sale of the stake was mandated by the Justice Department in December as a condition for the Frankfurt-based company’s planned takeover of NYSE Euronext.

“Like all of our other peers, it’s only logical for us to be looking at capital market alternatives all the time,” O’Brien said. “As the environment changes, that impacts how you look at them.”

A sale of shares by Direct Edge would follow an IPO filing in May by Lenexa, Kansas-based Bats Global Markets Inc., the third-largest U.S. stock exchange operator. Both are electronic platforms that rose to prominence in the last five years amid rules that curbed the dominance of the New York Stock Exchange and Nasdaq Stock Market. Direct Edge has been profitable for several years, O’Brien said.

Exchange Deals

The CEOs of NYSE Euronext and Nasdaq OMX Group Inc. said yesterday in interviews on Bloomberg Television that exchange mergers aren’t finished, even as larger cross-border deals have been blocked by regulators and investors. Nasdaq OMX’s Robert Greifeld said from Davos, Switzerland, that his company would pursue a strategy of “organic growth combined with bolt-on acquisitions.”

European antitrust regulators, led by European Union Competition Commissioner Joaquin Almunia, are preparing to formally prohibit the merger of NYSE Euronext and Deutsche Boerse, the last remaining deal after a year of failed attempts. Should the takeover be blocked, it would mean $37 billion in exchange mergers announced since October 2010 didn’t close, according to data compiled by Bloomberg.

“We think the post-trade space is important, we think the technology space is important,” Duncan Niederauer of NYSE Euronext told Bloomberg Television. “You’re going to see us focus most of our attention in those arenas, consistent with what we’ve articulated the standalone strategy to be before.”

$15 Million

Along with Deutsche Boerse, which owns its stake through New York-based International Securities Exchange, Direct Edge’s owners include Goldman Sachs Group Inc., Citadel LLC and Knight Capital Group Inc. The conversion of Direct Edge’s EDGX and EDGA venues to exchanges two years ago gave the company the same regulatory status as NYSE, Nasdaq OMX and Bats.

Direct Edge’s two exchanges accounted for 10.1 percent of U.S. equities volume last month. The company, which doesn’t have a listings or options business or overseas trading operation, introduced a service last year that allows customers to use their technology connections to receive quote and transaction data from other venues and send orders to those markets.

That business is a “material contributor” to our revenue, adding about $15 million last year, said O’Brien, whose company employs about 120 people.

Brazil Exchange

Direct Edge said in November it would build an exchange in Brazil this year. O’Brien said he still hopes to meet the goal. A study of market competition commissioned by the Brazilian securities regulator may be a “catalyst with respect to exchange competition” in Brazil, he said. Bats said earlier last year it was seeking to introduce an alternative trading platform for Brazilian shares with asset manager Claritas Investments.

Bats operates two U.S. equities venues, an options market and a European platform. It purchased Chi-X Europe Ltd., the largest alternative trading system in the continent, last year. Bats is owned by a group of brokers including Bank of America in Charlotte, North Carolina; Citigroup Inc. and Morgan Stanley in New York; Getco LLC in Chicago; and Zurich-based Credit Suisse Group AG.

O’Brien said he’s confident about Direct Edge’s ability to increase its revenue and earnings in the U.S. equities transaction business including through the provision of new market data services for customers.

“I’m encouraged by growth opportunities in our core business, which is transaction services,” O’Brien said. “When you look at the sizable revenue streams our peers have from those businesses, we’re really just scratching the surface.”

Electronic Trading

U.S. securities markets such as the New York Stock Exchange converted into for-profit companies over the last decade, with some becoming publicly held, as competition and rules encouraging electronic trading forced them to improve technology and lower costs. Both NYSE Euronext, owner of the Big Board, and Nasdaq OMX bought exchanges and alternative venues to boost market share and augment their offerings. The New York-based companies are now expanding their derivatives and technology services businesses.

The ISE acquired a 31.5 percent stake in Direct Edge in December 2008. New York-based Goldman Sachs, Jersey City-based Knight and Citadel in Chicago each own 19.9 percent. An additional 8.8 percent belongs to a group of five brokers, including New York-based JPMorgan Chase & Co.

“It’s going to continue to be a very robust capital markets environment for exchanges,” O’Brien said.

--with assistance from Nandini Sukumar in London and Erik Schatzker in Davos, Switzerland. Editors: Chris Nagi, Jeff Sutherland

To contact the reporter on this story: Nina Mehta in New York at nmehta24@bloomberg.net.

To contact the editor responsible for this story: Nick Baker at nbaker7@bloomberg.net.


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