Bats-Direct Edge merger puts broker-owned venues back on top

Bats Global Markets Inc.’s merger with Direct Edge Holdings LLC will put a broker-owned stock exchange operator in the top ranks on Wall Street for the first time since NYSE Euronext and Nasdaq OMX Group Inc. went public.

The Securities and Exchange Commission approved the combination and the company expects to close the transaction within days, Bats said today in a statement. The merged Bats Global Markets, whose owners include Goldman Sachs Group Inc., Morgan Stanley, Credit Suisse Group AG, Citadel LLC, Citigroup Inc. and KCG Holdings Inc., will run four exchanges that claim more than 20% of daily equity volume to challenge NYSE for the most market share.

NYSE and Nasdaq, which converted to public companies about a decade ago, have battled growing competition from Bats and Direct Edge as well as alternative trading venues run by some of the same Wall Street firms that once owned them. Combining the broker-owned exchanges will only heighten the threat, according to Brad Katsuyama, chief executive officer of IEX Group Inc., which runs a dark pool aimed at large investors.

“The combination of Bats and Direct Edge now has all the large brokers sitting around the same table, which is definitely not a positive thing for NYSE and Nasdaq given the percentage of orders concentrated with these brokers,” said Katsuyama, whose IEX venue plans to become an exchange.

Until 2003, the heads of 10 brokerages regulated by the NYSE sat on the exchange’s board and half the NYSE’s 12 public directors were presidents, CEOs or former CEOs of firms that traded on the exchange.

Changed Model

As markets evolved, NYSE and Nasdaq changed the model that had prevailed on Wall Street since traders in 1792 formed what would become the NYSE. In part pushed by competitive pressures from new trading venues, the companies went public and listed their shares on their own exchanges. NYSE was acquired by Atlanta-based IntercontinentalExchange Group Inc. in November.

“For centuries we had essentially mutual ownership of the exchanges,” Justin Schack, partner and managing director for market structure analysis at Rosenblatt Securities Inc., said in a phone interview. “We had a brief period in which we moved away from that because the two major market centers felt threatened by smaller and more nimble challengers.”

Bats and Direct Edge have used the “power of that mutual structure” to take market share away from NYSE and Nasdaq, according to Schack.

Bats considers its ownership structure a positive.

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