Bats Global Markets, which operates the third-largest U.S. equity market, approached Chi-X Europe Ltd. about a possible takeover, according to people familiar with the situation.
London-based Chi-X Europe, the trading platform started in 2007 to compete with London Stock Exchange Group Plc and Deutsche Boerse AG, said today it received an “enquiry” from an unidentified suitor which might lead to an offer for the whole firm or a partial sale. It’s being reviewed by the board, the firm said in an e-mailed statement.
The approach was from Bats, which also operates the Bats Europe stock trading system, said two people, who declined to be identified as the talks are private. The enquiry didn’t include details of the level of any potential offer or a valuation of Chi-X Europe, the people said.
“This won’t be purely a financial decision for Chi-X’s investors,” said Bruce Weber, who specializes in electronic trading and exchanges at the London Business School. “Both Bats and Chi-X in Europe were set up by the largest brokerage firms to pressure the traditional exchanges on fees and give them more negotiating power. So the question shareholders will be asking is what they want for the long term.”
A deal between Chi-X Europe, which traded almost 500 billion euros ($634 billion) of shares in the second quarter, and Bats Europe would unite the two largest stock-trading platforms that emerged after European regulators opened up competition in the industry in 2007. Traditional bourses such as NYSE Euronext, LSE, Deutsche Boerse in Frankfurt and New York- based Nasdaq OMX Group Inc. are struggling to win back market share lost to the new systems.
LSE in February completed the purchase of a majority stake in Turquoise, another electronic platform owned by a group of banks including Morgan Stanley, Credit Suisse Group AG, Bank of America Corp., Deutsche Bank AG and Goldman Sachs Group Inc.
“Chi-X is the premier alternative trading system in Europe,” Weber said. “Any exchange would be wise to take a look. I just don’t know if they would get over the financial hurdle that Chi-X investors would want. Secondly the shareholders might worry that in the hands of a traditional exchange Chi-X would lose its ability to pressure exchanges.”
Randy Williams, a spokesman for Bats in the U.S., today said the company doesn’t “comment on merger and acquisition speculation.” Julia Streets, a spokeswoman for Chi-X Europe, also declined to comment.
Bats, which isn’t publicly traded, is owned by a group of its users including Bank of America, Citigroup Inc., Credit Suisse, Deutsche Bank, Getco LLC, JPMorgan Chase & Co., the estate of Lehman Brothers Holdings Inc., Lime Brokerage LLC, Morgan Stanley, Tradebot Systems Inc. and Wedbush Morgan Securities.
Chi-X Europe, which started trading in March 2007, is also owned by a similar group including Instinet Inc., a New York- based unit of Nomura Holdings Inc., Citigroup, Bank of America, Getco, Zurich-based Credit Suisse and Morgan Stanley.
“We must take into consideration the strategic interests of shareholders and stakeholders,” John Woodman, chairman of Chi-X Europe, said today in the statement. “We were not seeking a transaction and the option of remaining independent would allow us to build further value for shareholders.”
Chi-X Europe was the first platform to challenge European bourses by offering lower fees and faster trading. Alasdair Haynes, who was named chief executive officer in 2009, said in February the company is generating profit and aims to become “the No. 1 exchange in Europe.”
“Chi-X was the first” of the new European trading systems “and clearly is the leader by market share,” said Andrew Mitchell, exchange analyst Macquarie Group Ltd. in London. “If a transaction happens, the buyer would be getting an established pan-European platform with a significant market share.”
Bats Global, based in Kansas City, Missouri, owns Bats Europe, the U.S. Bats Exchange Inc. and plans to start its second U.S. stock exchange, Bats Y-Exchange, or BYX, in October. Bats began trading stocks in 2006 and says it accounts for 11 percent of U.S. equity volume. It also runs a U.S. options exchange.
The number of trades on Chi-X Europe almost doubled in the second quarter to a record 72.1 million, from 37.1 million in the second quarter of 2009, the company said in July. The value of trades more than doubled to 482.3 billion euros from 209.5 billion euros in the comparable period a year ago. Dark trading, where prices aren’t publicly displayed, accounted for three percent of all activity.
Bats Europe aims to double its market share to as much as 10 percent of European trading by the end of 2010, Chief Executive Officer Mark Hemsley said last year.