Chicago Board Options Exchange’s Owner Said to Mull Buying Bats

  • Bats shares, which started trading in April, surge on news
  • Deal would push CBOE beyond the niche business of options

CBOE Holdings Inc. is in talks to acquire Bats Global Markets Inc., according to people familiar with the matter, which would unite the Chicago Board Options Exchange’s 43-year-old owner that still runs pits where humans trade contracts with a fully electronic stock market.

“You’re combining a premium product exchange with a scrappy upstart,” said Rich Repetto, an exchange analyst at Sandler O’Neill & Partners LP. “If both parties are motivated, they could successfully merge because there are plenty of areas where they don’t conflict or overlap.”

An agreement could be announced within weeks, though no final decision has been made and the talks may still fall apart, the people said, asking not to be identified as the matter is private. A spokeswoman for Bats, a company whose shares only started trading April following a long-awaited initial public offering, declined to comment. A representative for Chicago-based CBOE, which was founded in 1973, didn’t respond to a request for comment.

After news of the negotiations broke, shares of Bats surged 20 percent to $31.74 at 11:09 a.m. New York time Friday, the biggest rally since its IPO. CBOE rose 1.3 percent. KCG Holdings Inc., Bats’s largest shareholder, advanced 7 percent. Its CEO, Daniel Coleman, said this month that the electronic trading firm plans to start liquidating its Bats stake in October to fund buybacks.

CBOE’s Niche

Buying Bats would push CBOE beyond options and related futures contracts, a niche -- albeit a profitable one for the company -- compared with the areas where Bats does business. Bats is the second-biggest exchange operator in U.S. stocks, the largest in European equities and last year got into the $5.1-trillion-a-day currencies industry.

The two companies have vastly different roots. Lenexa, Kansas-based Bats was founded in 2005 by high-speed trader David Cummings of Tradebot Systems Inc., and its trading software is regarded as among the industry’s best. CBOE still runs open-outcry pits in Chicago, a throwback to an era when humans instead of computers drove trading -- though it does run the all-electronic C2 exchange, too. Bats runs a relatively lean operation because it operates in commoditized businesses, whereas CBOE enjoys monopolies in two key products: S&P 500 and VIX options.

Reclaiming Lead

Bats went public in April, completing an IPO four years after an error with the exchange operator’s own software foiled a first attempt to go public. Its shares are up 40 percent since the listing, valuing the company at about $2.6 billion. The Chicago Board Options Exchange, CBOE’s main market, is the largest U.S. options exchange. The company has a market value of about $5.6 billion.

CBOE would reclaim its market-share lead in U.S. options trading by purchasing Bats, edging out Nasdaq Inc. CBOE’s two exchanges plus Bats’s two options markets handle about 38 percent of industry volume. Nasdaq, which bought three options markets from Deutsche Boerse AG this year, handles about 36 percent.

Although Nasdaq surpassed CBOE in total trading, CBOE still holds the jewels of the options market: exclusive rights to contracts on the S&P 500 and VIX. Fierce price competition among exchanges has made most trading less lucrative. Anyone who wants to buy or sell Apple Inc. contracts, for instance, has 14 markets they can turn to. But traders must turn to CBOE to buy and sell S&P 500 and VIX options.

ETF Foothold

Acquiring Bats would give CBOE a foothold in the fast-growing business of exchange-traded funds. Bats Chief Executive Officer Chris Concannon predicted this year that ETF assets will grow fivefold by 2026 from about $2.7 trillion currently. CBOE already trades options linked to ETFs, but a deal with Bats would mean it could operate a venue for buying and selling the funds themselves, which trade like stocks.

“CBOE and Bats are an interesting combination,” said Andy Nybo, a partner at Tabb Group. “Obviously two different cultures, two different backgrounds.” 

The talks between CBOE and Bats come as two of the world’s biggest exchanges, Deutsche Boerse and London Stock Exchange Group Plc, try to combine. “It’s not unexpected to see continued activity in the exchange space,” Nybo said. “Global exchanges as well as regional exchanges need to expand their footprint to grow their revenues, grow their business.”

This wouldn’t be CBOE’s first foray into U.S. stocks. It owned stakes in the CBOE Stock Exchange, which is now defunct, and the National Stock Exchange, which it no longer owns.

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