CBOE Agrees to Buy Market Operator Bats for $3.2 Billion

  • Tilly to become CEO, Concannon to be president and COO
  • Deal is expected to be completed in the first half of 2017

CBOE Holdings Inc., which invented the options market in 1973 with the Chicago Board Options Exchange, agreed to acquire Bats Global Markets Inc. for about $3.2 billion to expand into stocks, ETFs and currencies trading.

Edward Tilly, chief executive officer at CBOE Holdings, will keep that role in the combined company, while Bats CEO Chris Concannon will become president and chief operating officer, according to a statement on Monday. CBOE will use Bats’s technology to run trading at the combined company, which will be based in Chicago.

“We’re excited about what we have ahead of us,” Bats’s CEO Concannon said on a call with analysts and reporters following the announcement. “We’re excited about how to be disruptive in a new way.”

CBOE is turning to Bats, whose core trading software is considered among the best in the industry, for cost savings, technology and earnings growth. Bats handles about a quarter of all U.S. trading in exchange-traded funds, among the hottest growth areas for exchanges, and also gives CBOE a new revenue stream from selling market data to customers. Concannon predicted this year that ETF assets will grow five-fold by 2026 from about $2.7 trillion currently. 

Bats, which went public in April, first reached out to CBOE before the initial public offering, according to people familiar with the discussions. Then CBOE got back in touch over the summer, which is when talks began in earnest, according to the people, who asked not to be named because the discussions were private.

Cost Savings

CBOE will eliminate its platform in favor of the Bats technology, and Bats executive Chris Isaacson will become chief information officer of the combined entity. The shift to Bats technology is part of a plan to save $50 million annually within three years of the transaction’s completion. Those cost synergies will increase to $65 million within five years, the companies said.

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. 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. CBOE said it plans to keep those trading pits in Chicago following completion of the deal.

‘Culture Clash’

The deal could set up “a tremendous culture clash, which might lessen the value of Bats post-acquisition if its talent heads for the exit,” wrote David Weiss, an analyst at Aite Group, in a note after the announcement. “Just consider Bats being all-electronic from the jump, while CBOE still has open-outcry pits.”

The deal, a mix of cash and stock, which still requires shareholder and regulatory approval, is expected to close in the first half of 2017, the companies said.

The purchase adds to a flurry of dealmaking among exchange operators -- Deutsche Boerse AG’s $14 billion planned purchase of London Stock Exchange Group Plc would be among the biggest in the industry’s history. Terms of the deal give Bats shareholders $10 a share in cash plus 0.3201 of a share of CBOE, though they can elect all cash or all stock. Bats only became a public company in April.

Shares in Bats have surged 20 percent since Sept. 22, the day before Bloomberg News reported the companies were in talks to combine. Bats lost 1.6 percent to $31.29 at 9:35 a.m. New York time Monday.

ETF Trading

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. 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 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 this year, handles about 36 percent.

CBOE Jewels

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.

The companies are particularly focused on expanding CBOE’s options volatility and complex derivatives offerings in Europe. 

“We’ve had an eye toward Europe for quite some time,” said John Deters, chief strategy officer of CBOE. Concannon called Europe “the one opportunity that most people watching this transaction will underappreciate.”

CBOE CEO Tilly has worked at the company since the 1980s. Concannon joins after stints at key employers in the industry. Before joining Bats, he worked at automated trading firm Virtu Inc. He previously worked at Nasdaq Inc. as well as the Securities and Exchange Commission.

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