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Merger of Bats Global Markets, Direct Edge Holdings could challenge Wall Street mainstays

Updated: 2013-08-27T00:49:02Z


The Kansas City Star

An eight-year-old Lenexa company pushed its way into the top echelons of Wall Street on Monday with a merger deal to put it on a par with Nasdaq and the New York Stock Exchange.

Bats Global Markets Inc., already the third-largest U.S. stock exchange, is merging with the No. 4 player in the industry, Direct Edge Holdings LLC of Jersey City, N.J.

Combined, these electronic stock markets would be second in size only to the NYSE as the computerized trading world has supplanted the old familiar trading floors full of yelling market specialists and traders.

“The scale we’ll get will allow us to be even more credible and competitive with the other large players in the industry,” said Joe Ratterman, Bats’ chief executive.

If federal regulators approve the merger, it would complete the shared mission of Bats and Direct Edge: to rise up against the entrenched New York exchanges through the technology of modern markets and the push from regulators for competition.

Terms of the deal weren’t available, but the new company would keep Bats’ name and its Lenexa headquarters.

The merger, however, also means job losses are likely as the companies plan to replace the technology that Direct Edge uses to run its electronic stock exchange with the technology that Bats uses.

Ratterman acknowledged the potential for layoffs from eliminating duplicate technologies, but he called the impact “unknown” and the job decisions weeks or months away.

Bats, a Kansas City startup that moved to Lenexa in 2008, employs 98 of its 164 employees at its headquarters. Others are in New York and London, as the company also operates exchanges in Europe. Direct Edge has about 130 employees in its New Jersey headquarters.

In their announcement, the merging companies said Ratterman would be chief executive. Direct Edge’s chief executive, William O’Brien, would become president, and Direct Edge’s chief operating officer, Bryan Harkins, would be “an integral member of the senior executive team.”

Ratterman, acknowledging recent federal opposition to mergers in the airline and other industries, said executives do not “presume” their deal will win regulatory approval here or in Europe.

They plan to make the case that their pro-competition origins make their assent to equal footing with the older markets a benefit to the industry and investors.

“It pretty much guarantees you’re going to have a significant force to be reckoned with in the global exchange place for decades to come,” Direct Edge’s O’Brien told The New York Times.

Bats began in 2005 as the brainchild of Dave Cummings, a former Cerner Corp. employee who runs a high-frequency trading company in Kansas City called Tradebot. He named his new market Bats because it offered a better alternative trading system.

The NYSE and Nasdaq bought up many other young electronic markets as the industry turned increasingly toward computerized trading and the advances in market technology. Cummings sold stakes in Bats to the brokerage community that also helped fuel its growth.

Bats and Direct Edge increasingly grabbed a growing share of daily trading volume, recently about 10 percent each. That compares with Nasdaq’s 18 percent and the NYSE’s 23 percent, according to an estimate by The Wall Street Journal.

News of their merger, which surfaced Friday, came amid a wave of trading disruptions and other problems linked to the complex computerized systems that dominate equity trading in the United States.

Last week, for example, the Nasdaq suffered a three-hour shutdown that it attributed to problems connecting with other exchanges. Federal regulation requires markets to speak electronically with one another so traders can seek out the best prices.

Bats similarly suffered a 50-minute shut down recently that it attributed to connectivity issues. Technology problems also disrupted and ultimately prevented Bats from launching public trading of its own stock last year.

Ratterman acknowledged there will be risks as Direct Edge switches over to the technology Bats developed and uses to run its exchanges. He said Bats had no problems with a similar switch when it acquired a European stock exchange called Chi-X Europe. He said the switch at Direct Edge probably will come in six to 12 months.

The merger requires federal approval. Regulators will review its impact on competition in equity exchanges and on the operation of financial markets.

The merger of Bats and Direct Edge follows a wave of consolidation in the exchange industry. Atlanta-based IntercontinentalExchange Inc. is completing its purchase of the company that owns the NYSE and markets in Europe.

Several commodities exchanges, including the Kansas City Board of Trade, have combined under the Chicago-based CME Group. CME Group closed the Kansas City trading floor at the end of June.

While Bats and Direct Edge are combining, they would not merge their exchanges. Each operates two U.S. stock exchanges and would continue to run all four.

Some outsiders have complained that the industry has evolved into a fractured collection of 13 stock exchanges that add to the complexity problems it is having.

One is Joe Saluzzi, the co-head of equity trading at Themis Trading LLC in New Jersey and the co-author of “Broken Markets: How High Frequency Trading and Predatory Practices on Wall Street are Destroying Investor Confidence.” Saluzzi said Monday that the Securities and Exchange Commission should require firms to merge their stock exchanges, not just their ownership.

Today’s multiple markets spread trading activity too thinly, he wrote on a blog Monday. Fewer markets would mean deeper ones that would provide a “healthier price discovery process,” he wrote.

Saluzzi said the flow of information from so many markets puts stresses on the system by which trading information from all the markets is consolidated into one combined picture that firms and the public see.

Ratterman said he rejects Saluzzi’s claims outright. The different exchanges at Bats and Direct Edge, he said, offer slightly different terms to the brokerages and trading firms that do business there. The success of each attests to its value in the eyes of the broker-dealer community that carries out trading in stocks.

At the same time, traditional stock exchanges such as Bats, the Nasdaq and the NYSE are losing business to another group of young markets called dark pools. These markets accept typically large orders from firms without revealing the other orders available on their market. Hence, they are dark. Traditional markets are “lit” and display openly their book of available orders to buy and sell at various prices.

Eric Hunsader, the chief executive of Nanex LLC, which provides real-time market data to traders, said dark pools have captured perhaps a third or more of the volume in U.S. stocks. He said they are popular with some large traders who think the visibility of their orders can work against them in a lit market.

To reach Mark Davis, call 816-234-4372 or send email to

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