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BATS buying Chi-X Europe, challenge national rivals

By Luke Jeffs and Jonathan Spicer

LONDON/NEW YORK (Reuters) - BATS Global Markets, the U.S.-based exchange operator, is taking over peer Chi-X Europe in a deal that could put even more pressure on the dominance of national bourses that themselves are banding together to survive.

The deal to create so-called BATS Chi-X Europe, announced on Friday, is the latest in a spate of merger plans rocking the world's stock-trading market.

Dealer-owned BATS said it expects the combination should face little regulatory resistance, and should ultimately position it to expand into more profitable derivatives trading, and possibly a listings business.

Kansas City-based BATS, which has been in exclusive takeover talks with Chi-X since December, is keen to break the stranglehold of national exchanges like Deutsche Boerse <DB1Gn.DE> and the London Stock Exchange Group <LSE.L>, which respectively are working on similar tie-ups with NYSE Euronext <NYX.N> and Canada-based TMX <X.TO>.

"What this acquisition does is accelerate our plans globally and ... allows us to get to the next page in the playbook and start looking at asset class expansion," BATS Chief Executive Joe Ratterman said in an interview.

"Futures, fixed income, foreign exchange are all nice, relatively manageable technology expansions for us now."

Chi-X and BATS, which plan to launch futures trading in the next year, would have a combined European equity market share of 22.9 percent while Deutsche Boerse and NYSE Euronext would have 29.7 percent combined, and the LSE 23.4 percent, Thomson Reuters data shows.

The firms did not disclose the value of the transaction, which they said is expected to close in the second quarter of this year. A source told Reuters previously that BATS was paying Chi-X more than $300 million in stock and that the deal could value BATS at $1.2 billion.

The BATS agreement came amid a flurry of exchange activity. The LSE on February 9 agreed to buy Toronto Stock Exchange parent TMX, and Deutsche Boerse agreed a $10.2 billion takeover of NYSE Euronext on February 15.

Exchange groups such as LSE, NYSE Euronext, Deutsche Boerse and Nasdaq OMX <NDAQ.O> dominated European share trading until the European Commission's 2007 Markets in Financial Instruments Directive (MIFiD) allowed the emergence of competition.

"As NYSE and Deutsche Boerse demonstrated, there just is no market anymore that is immune to these competitive pressures," said Maureen O'Hara, a market structure expert and finance professor at Cornell University.

"You've had the rise of various trading platforms, and that's just testimony to the dynamic nature of these markets."

MULTI-LATERAL TRADING FACILITIES

BATS and Chi-X are owned by many of the world's top banks. Citigroup Inc <C.N>, Bank of America Merrill Lynch <BAC.N> and Morgan Stanley <MS.N> are among the investment banks and Getco, a big market maker and proprietary trading firm, is among the five high-frequency trading firms with stakes in both.

Chi-X Europe went live in 2007, making it the first of the alternative platforms, known as multi-lateral trading facilities (MTFs), and it was followed in 2008 by BATS Europe and Turquoise.

But the MTFs struggled to break even, launching in the midst of the financial crisis, and traders began to question their viability as early as 2009. Turquoise was sold to the LSE in February last year.

BATS Global Markets and Chi-X Europe emerged as the most successful of the MTFs with a 16.5 percent market share,

They expect little resistance to a tie-up, but Deutsche Boerse's takeover of NYSE Euronext faces regulatory scrutiny. European traders question whether the exchanges, which between them account for over 90 percent of European futures trading, will be allowed by the authorities to retain this dominance.

BATS Europe Chief Executive Mark Hemsley said: "The combination of NYSE Euronext Liffe and Deutsche Boerse Eurex has prompted a slew of inquiries from customers about derivatives trading and we will look to roll this out after the integration, which we expect to complete this year."

Broadhaven Capital Partners, through Beech Hill Securities, acted as financial adviser to BATS Global Markets with legal advice furnished by Davis Polk and Macfarlanes. For Chi-X Europe, Lexicon Partners acted as financial adviser with Slaughter and May as well as Alston and Bird serving as legal advisers.

Nomura Holdings Inc's <8604.T> Instinet, a large shareholder in Chi-X Europe, is being advised by Financial Technology Partners in the deal, a source told Reuters previously.

(Reporting by Luke Jeffs; Additional reporting by Paritosh Bansal and Jonathan Spicer in New York; Editing by Sinead Cruise, Erica Billingham, Gunna Dickson, Gary Hill)

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