Bats Agrees to Buy Chi-X Europe as Competition Grows
Bats, the fourth-largest operator of U.S. equity markets and Europe’s second-biggest alternative trading platform, didn’t disclose financial terms in a statement today. Bats, based in Kansas City, Missouri, is paying $300 million plus $65 million in potential future payouts if profit beats targets, according to two people familiar with the matter, who declined to be identified because the terms aren’t public. Randy Williams, a spokesman for Bats, declined to comment.
“Our goal is to grow our markets to a critical-mass level so they have good momentum and trajectory,” Bats Chief Executive Officer Joe Ratterman said in an interview today. “This is a rare instance where an acquisition made sense on lots of fronts and accelerates our business plans in Europe.” He said Bats Global Markets may consider converting its European markets into registered exchanges.
Chi-X handled 16 percent of stock trading in Europe during the past five days, based on the value of shares changing hands, according to data compiled by Bats. The compares with 21 percent for London Stock Exchange Group Plc, 17 percent for NYSE Euronext and 5.7 percent for Bats.
Spate of Takeovers
The announcement follows Frankfurt-based Deutsche Boerse AG’s agreement this week to buy New York-based NYSE Euronext for $9.53 billion, creating the world’s largest exchange operator. Singapore Exchange Ltd. bid A$8.35 billion ($8.47 billion) in October for ASX Ltd., which runs the Australian stock market, and London Stock Exchange Group agreed to pay 1.94 billion pounds ($3.15 billion) last week to buy Canada’s TMX Group Inc.
Ratterman said Bats may list companies in Europe. Bats Chi- X Europe will maintain two public order books in the region for buy and sell requests while operating both markets on Bats technology, said Mark Hemsley, chief executive officer of Bats Europe. Separate order books will allow the firm to attract different types of users to each equities market through pricing geared to those participants, he said.
Ratterman said he’s pleased by recent industry mergers since they may allow his company to showcase its flexibility and low-cost business model. Bats was founded in 2005.
“Large players are getting even larger,” he said. “As a nimble startup firm that’s able to compete on a global scale with a fraction of their overhead and footprint, we like it when our competitors get even bigger.” He declined to say whether the company will sell shares in an initial public offering.
Chi-X competes with traditional exchanges such as LSE and Deutsche Boerse by offering lower fees and faster trading. The company is partly owned by Instinet Inc., a New York-based unit of Nomura Holdings Inc., and investment banks and traders including Credit Suisse Group AG, Getco LLC, Bank of America Corp., Citigroup Inc. and Morgan Stanley. Bats is owned by Bank of America, Citigroup, Getco, Credit Suisse and Morgan Stanley, among others.
“This puts together the market shares of Bats Europe and Chi-X Europe and gets immediate synergies particularly in the technology area,” Hemsley said. “We’ll be able to offer customers the low-latency Bats trading platform and the Chi-X and Bats books. We’ll also be able to rationalize other elements of the technological infrastructure.”
Broadhaven Capital Partners was financial adviser to Bats while Davis Polk & Wardwell LLP and Macfarlanes LLP gave legal assistance, according to the statement. Chi-X Europe got financial counsel from Lexicon Partners, with legal advice from Slaughter & May and Alston & Bird.
“These are two smaller players in a big pond,” said Paul Zubulake, senior analyst for futures and options at Boston-based Aite Group LLC. “Bats has superior technology to pretty much all the platforms out there, so on the equities side they’re definitely a force to be reckoned with. The LSE and Deutsche Boerse are obviously concerned.”
Bats Chi-X Europe also expects to move into derivatives trading in Europe and expand its distribution of market data, Hemsley said. Bats Global Markets operates an equity options platform in the U.S. That system could serve as the basis for futures and options trading in Europe, he said. The company is likely to initially focus on equity derivatives, he said.
“Especially given the recent moves with Deutsche Boerse and NYSE Euronext, there is concern that there’s becoming a monopoly provider in Europe of derivatives trading,” Hemsley said. “There’s a very ready appetite in the trading community for alternate platforms where derivatives can be traded.”
Zubulake said Bats has hurdles ahead if it plans to build a derivatives market in Europe.
“Options on single-name equities in Europe is not an active market and without common clearing in futures the chance for a formidable challenge to the existing markets will be an uphill battle,” he said.