BATS merger sends Nasdaq into third place

EXCHANGE operators BATS Global Markets and Direct Edge confirmed their plans to merge yesterday, in the latest threat to the dominance of the New York Stock Exchange and the Nasdaq.

BATS, a relative newcomer to the trading business, said its tie-up with Direct Edge will create an operator with a track record in creating “a more competitive marketplace to benefit all investors”.

The new group will control four US equity exchanges, which together represent around 24 per cent of the country’s trading volumes.

If approved by regulators, the deal will make BATS the second-biggest operator in the country, just behind NYSE Euronext, on 25 per cent, and ahead of the Nasdaq, on 16 per cent.

BATS, founded in 2005, also runs Chi-X, the largest pan-European stock exchange.

The enlarged company will remain privately owned, with major investors including Goldman Sachs, JP Morgan and Citigroup.

BATS chief executive Joe Ratterman will take the helm, while Direct Edge boss William O’Brien will become president of the combined firm.

Financial terms of yesterday’s agreement were not disclosed. The deal is expected to close in the first half of 2014, subject to regulatory approvals.

The demotion of Nasdaq to third place is another major blow after trading on the exchange was cut for three hours on Thursday due to a technical malfunction.

The outage, which left more than a third of the US stock market idle, led Nasdaq chief executive Robert Greifeld to admit exchanges needed more robust systems in place to cope with the number of platforms available.

“We have 13 different exchanges, we have hundreds of market participants, we are all interconnected in a number of fundamental ways,” he said.

The wide variety of exchanges has contracted in the past two years due to a wave of consolidations in the trading platform sector.

NYSE Euronext was the subject of a takeover in December when IntercontinentalExchange snapped it up for $8.2bn.

The deal followed the $2.1bn takeover of the London Metal Exchange by the Hong Kong Exchanges & Clearing in June 2012.

CME and Deutsche Boerse were also said to have held talks earlier this year.

ADVISERS BATS AND DIRECT EDGE TIE THE KNOT

BROADHAVEN
EVERCORE
BANK OF AMERICA MERRILL LYNCH

In an industry that has seen a wave of mergers and takeovers in recent years, there are a handful of experienced advisers that tend to guide exchange operators in these deals.

BATS turned to Broadhaven Capital Partners for advice during months of tie-up talks with Direct Edge. The Connecticut-based investment bank lists just seven employees on its website, but has featured in some of the biggest exchange deals of recent years.

Broadhaven worked with Intercontinental Exchange (ICE) on last year’s purchase of NYSE Euronext, known as the Big Board for its dominance of the US stock markets. It also advised the Nasdaq when it tried to team up with ICE to make a tilt at NYSE a year earlier, and BATS on its 2011 purchase of Chi-X.

Direct Edge was advised by Evercore and Bank of America Merrill Lynch. Jane Gladstone, pictured, was named as Evercore’s lead banker on yesterday’s deal, and has amassed several stock exchange deal credits as head of the financial institutions group including advising Creditex during its $625m sale to ICE in 2008.

Bank of America fielded a team led by David Alder and Kaivan Shakib, both of whom appeared on the Nasdaq ticket during its NYSE approach.