Exchange operators BATS and Direct Edge to merge

Mon Aug 26, 2013 12:31pm EDT
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By John McCrank

(Reuters) - BATS Global Markets Inc and Direct Edge Holdings said on Monday they would merge, in a deal that would create the second-largest U.S. stock exchange operator after NYSE Euronext NYX.N.

The stock trading business has been in decline for more than three years, as uncertainty over the global economy pushed retail investors to the sidelines and low market volatility hit volumes. Exchange operators have been looking for new sources of revenue, including in areas of market data and technology.

They have also been trying to combine to create scale and take out costs.

The deal comes just months after Big Board operator NYSE Euronext agreed to sell itself to IntercontinentalExchange (ICE.N: Quote) in a deal currently valued at around $10.6 billion, making it a bigger player in the derivatives market, as opposed to the low-margin equity market.

BATS and Direct Edge have had talks several times in the past, but the valuation of Direct Edge was always an issue, several sources familiar with the situation said. The future of BATS has been in question ever since it tried to go public on its own exchange last March under the symbol "BATS" BATS.Z. A technical glitch led to the IPO being pulled.

Financial terms of Monday's deal were not disclosed. It is expected to close in the first half of 2014, subject to regulatory approvals. The new company, which will be headquartered in the Kansas City area, will surpass Nasdaq OMX Group (NDAQ.O: Quote) as the No. 2 U.S. equities exchange.

A combined BATS-Direct Edge would give the exchange more liquidity that could draw more trading its way. That in turn would give it richer trading data, which could yield to more revenues.

NYSE, Nasdaq and Direct Edge had already been charging fees for their data, which provides a steadier source of income than trading fees. About 15 percent of NYSE's $2.3 billion in revenues last year came from market data. About 21 percent of Nasdaq's $1.7 billion in revenues was derived from its data products. BATS only began charging its U.S. clients for access to its proprietary market data as of July 1.   Continued...