Shares of Lenexa-based Bats Global Markets jumped nearly 20 percent Friday on an unconfirmed report that it is in talks to be acquired by Chicago-based CBOE Holdings Inc.
A deal would fold ownership of the nation’s second-largest stock exchange into the large options markets operator.
Bloomberg News reported after markets closed Thursday that the companies were in merger talks, citing “people familiar with the matter.”
A Bats spokeswoman declined to comment on the report. Bloomberg said the CBOE did not immediately respond.
Shares of Bats gained $5.27 on the day, a 19.86 percent surge, to close at $31.80. Bats became a publicly traded company in April, setting its initial share price at $19.
“You’re combining a premium product exchange with a scrappy upstart,” said Rich Repetto, an exchange analyst at Sandler O’Neill & Partners LP. “If both parties are motivated, they could successfully merge because there are plenty of areas where they don’t conflict or overlap.”
Bloomberg said its sources claimed that an agreement could be announced within weeks, though no final decision has been made and the talks may still fall apart. The sources had asked not to be identified as the matter is private.
Buying Bats would push CBOE beyond options and related futures contracts, a niche business — albeit a profitable one for the company — compared with the areas where Bats operates. Bats is the second-biggest exchange operator in U.S. stocks, behind the New York Stock Exchange but larger than Nasdaq. Bats also is the largest in European equities and last year got into the $5.1 trillion-a-day currencies business.
The two companies have vastly different roots.
Bats was founded in 2005 by high-speed trader David Cummings of Kansas City-based Tradebot Systems Inc., and its trading software is regarded as among the industry’s best. CBOE still runs open-outcry pits in Chicago, a throwback to an era when humans instead of computers drove trading, though it also runs the all-electronic C2 exchange.
Bats runs a relatively lean operation because it operates in commoditized businesses, whereas CBOE enjoys monopolies in two key products: S&P 500 and VIX options.
Bats went public in April, completing an IPO four years after an error with the exchange operator’s own software foiled a first attempt to go public. Its shares are up 40 percent since the listing, valuing the company at about $2.6 billion. The Chicago Board Options Exchange, CBOE’s main market, is the largest U.S. options exchange. The company has a market value of about $5.6 billion.
CBOE would reclaim its market-share lead in U.S. options trading by purchasing Bats, edging out Nasdaq Inc. CBOE’s two exchanges plus Bats’ two options markets handle about 38 percent of industry volume. Nasdaq, which bought three options markets from Deutsche Börse AG this year, handles about 36 percent.
Although Nasdaq surpassed CBOE in total trading with the acquisition, CBOE still holds the jewels of the options market: exclusive rights to contracts on the S&P 500 and VIX. Fierce price competition among exchanges has made most options trading less lucrative. Anyone who wants to buy or sell Apple Inc. contracts, for instance, has 14 markets they can turn to. Only CBOE can offer S&P 500 and VIX options.
Acquiring Bats would give CBOE a foothold in the fast-growing business of exchange-traded funds. Bats CEO Chris Concannon predicted this year that ETF assets will grow fivefold by 2026 from about $2.7 trillion currently. CBOE already trades options linked to ETFs, but a deal with Bats would mean it could operate a venue for buying and selling the funds themselves, which trade like stocks.
“CBOE and Bats are an interesting combination,” said Andy Nybo, a partner at Tabb Group. “Obviously two different cultures, two different backgrounds.”
The Star’s Mark Davis contributed to this report.