Combining Bats Global Markets Inc. with Direct Edge Holdings LLC should help the company compete with larger exchange operators selling market data, Chief Executive Officer Joe Ratterman said.
Bats, the Lenexa, Kansas-based electronic stock market founded in 2005, said yesterday it agreed to merge with Direct Edge in Jersey City, New Jersey, creating what today would be the second-biggest U.S. equity exchange owner. Charging for data is a new business for Bats and it may improve after the deal with Direct Edge, which could double its share of stock transactions, Ratterman said.
Exchange companies have sought new sales sources as profits from trading shrunk because of falling volume and competition. Nasdaq OMX Group Inc. bought electronic bond platform eSpeed in July while NYSE Euronext is being taken over by futures exchange operator IntercontinentalExchange Inc. (ICE:US) Bats and Direct Edge are focused on equities and may wring more money from data, Ratterman said in a phone interview yesterday.
“If you look in the area of market data, there’s products we can offer when you cover a broader percentage of daily activity that suddenly become interesting to your customers,” said Ratterman. “And when your larger competitors have products like that, now we can compete with them and bring even more innovation and better pricing.”
While the prospectus for Bats’s canceled initial public offering last year showed $55.4 million of revenue from data in 2011, the money represented its portion of fees that all exchanges divide for posting prices to national feeds. In addition to its share of that pool, Nasdaq posted another $135 million that year for U.S. market data products, according to its financial statements. That’s where Bats may compete more closely after the merger is completed, said Ratterman.
“In our position today, customers wouldn’t find it relevant, but put us together and they’ll find us just as, if not more, relevant,” he said.
Markets run by NYSE Euronext (NYX:US) and Nasdaq account for roughly 20 percent of average daily U.S. stock trading, according to data on Bats’ website. The exchanges operated by Bats and Direct Edge also post a total of about 20 percent.
Direct Edge and Bats, the third- and fourth-largest equity market owners, expect their merger will close in the first half of 2014, according to a statement yesterday. Ratterman will keep the CEO role, while Direct Edge CEO William O’Brien will be president. Financial details weren’t disclosed.
Formed by traders and investment banks, the closely held companies are merging amid a four-year decline in American equity volume. Shares changing hands on U.S. exchanges fell 36 percent since 2009 to 6.3 billion shares a day in 2013 and profits for high-frequency traders slipped 80 percent, according to data compiled by Bloomberg and Rosenblatt Securities Inc.
“Volume is weak,” Dan Veru, the chief investment officer who helps oversee $4.5 billion at Palisade Capital Management LLC, said by phone from Fort Lee, New Jersey. “That’s been the trend going on for quite some time. So unless you have real scale, it’s difficult to compete. Mergers like this probably create some scale.”
The companies operate two exchanges each and all of them will keep running, using Bats’s technology, according to the statement. The combination will be headquartered near Kansas City, Missouri.
Electronic platforms have seen their reputations dim over the last week after a connectivity issue caused Nasdaq to halt trading in all its listed shares for three hours on Aug. 22 and Goldman Sachs Group Inc. bombarded markets with mistaken options orders on Aug. 20. Bats shut its main venue for almost an hour on Aug. 6 when a computer system malfunctioned.
Bats, run with about 160 employees from a two-story office complex, operates two stock exchanges and an options market in the U.S. as well as Bats Chi-X Europe, the largest pan-European stock exchange.
Both companies count trading firms and banks among their owners, and Bats gained two new shareholders this month. Private-equity firms Spectrum Equity Investors LP and TA Associates Management LP bought all of Lehman Brothers Holdings Inc.’s estate when it exited its investment, according to a statement from Bats and the investors.
Bats lists Getco LLC as its largest owner with a 15.4 percent voting interest. Others are Morgan Stanley, Credit Suisse Group AG, Nomura Holdings Inc. and Citigroup Inc. KCG Holdings Inc., Goldman Sachs Group Inc. and Citadel all have a 19.9 percent stake in Direct Edge. An additional 8.8 percent belongs to a group of five brokers, including New York-based JPMorgan Chase & Co.
Stock exchanges make money in four ways, said Larry Tabb, CEO of the Tabb Group, a market research firm: transactions, listings, market data and technology. At the moment, Bats is mostly generating income from transactions, he said.
“In Europe, they didn’t charge for data, but when they did they talked about how they would offer it at a discount,” to competitors, said Tabb in a phone interview. “I can imagine they would do the same in the U.S.”
Ratterman said the company’s priority is to gain regulatory clearance for the proposed deal, and to transfer the firm entirely to Bats’s technology. Plans for growth, which may include exchanges in other countries or asset classes such as fixed income or foreign exchange, will come soon after, he said.
“We’re never going to let up in our push to be a more relevant part of every market that we’re in,” Ratterman said. “We’ll continue go after more of the share that’s available, and we don’t ever plan on letting up on the gas pedal. Is there room for us to grow? Absolutely.”
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