News Column

BATS Global Markets May Merge With Direct Edge

Aug 26 2013 12:38PM

Mark Davis

stocks

Bats Global Markets, the Lenexa-based operator of the nation's third largest stock exchange, would become bigger than Nasdaq under a reported potential merger.

Bats is in talks with Direct Edge Holdings LLC in New Jersey, according to media reports. Officials with each company declined to comment.

Reports of their potential merger surfaced a day after Nasdaq suffered an embarrassing three-hour shutdown caused by technology problems.

Bats and Direct Edge each began as alternative electronic markets to the two big U.S. stock exchanges, Nasdaq and the New York Stock Exchange. Each has grown to handle about 10 percent of the daily trading volume in U.S. company stocks.

Combined, their roughly 20 percent share would fit between Nasdaq's 18 percent and the NYSE's 23 percent, according to a tally by The Wall Street Journal.

"It confirms the old guard has really moved on," said Jeffrey Wallis, head of SunGard Consulting Services, where he focuses on technology and regulatory changes.

A merger also would allow Bats and Direct Edge to compete more effectively in an increasingly challenging industry that has seen multiple mergers in recent years. The IntercontinentalExchange Inc. of Atlanta, for example, is wrapping up its acquisition of NYSE Euronext, which operates in the United States and Europe.

Bats also operates markets in the United States and Europe. Direct Edge would add additional U.S. business in a merger.

"It makes sense to me," said Eric Hunsader, chief executive of Nanex LLC, which provides real-time market data to traders. "It can reduce their costs."

Bats employs 164 people in the United States and London, with 98 working at its Lenexa headquarters. It has eight in New York, where its computers link with the vast array of electronic systems that make up the bulk of equities trading in the United States.

Direct Edge's 130 employees work in Jersey City, N.J.

Hunsader said cost savings mostly would come from needing fewer employees to manage a combined operation. Notably, the electronic stock exchanges would need fewer employees to develop and handle computer software and systems.

If a merger led to cutbacks, lower labor costs could mean a leg up for Kansas City.

"I'd keep the developers in Kansas City because of the costs," Hunsader said.

The combined companies' headquarters, however, should be in New Jersey, he said, to be closer to the center of the financial markets.

Both companies have a reputation for operating well, though each has suffered technical problems.

Bats, for example, suffered a nearly one-hour shutdown recently because of technical problems and botched its effort to begin trading its own shares on its exchange in 2012.

Wallis said the industry's struggles with the technology and complexity of modern markets have invited added regulatory scrutiny and oversight. And that means higher regulatory costs and more pressure for cost-cutting moves.

Bats began in 2005 as an electronic stock market led by Dave Cummings, a former Cerner employee who ran an electronic trading company called Tradebot. Cummings' idea was to build a better alternative trading system, hence the name Bats.

The company sought federal approval in 2007 to become a stock exchange, which also gave it the ability to help companies become publicly traded.

Bats' own shares were to be the first initial public offering on the Bats Exchange. But a software bug disrupted the offering and forced the company to cancel its debut. Bats remains privately owned, largely by broker-dealer firms.

The company has capitalized on the baseball image its name conjures up. Its sign is behind home plate at Kauffman Stadium.

Bats in 2012 earned $101 million before interest, taxes and amortization, according to one published report. Direct Edge's financial information wasn't available.

Direct Edge began in 1998 under the name Attain. It took the new name in 2005 and became a stock exchange in 2010.

Star news services contributed to this report. To reach Mark Davis, call 816-234-4372 or send email to mdavis@kcstar.com.

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(c)2013 The Kansas City Star (Kansas City, Mo.)

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