The London Stock Exchange Group (LSEG) and the Investment Management Association (IMA) have told the UK's Competition Commission they see no reason to block the potential merger of pan-European multilateral trading facilities (MTFs) BATS Europe and Chi-X Europe.
During a hearing with the Commission – which is examining the merger's impact on secondary trading competition – the LSE together with its MTF Turquoise pointed out that it was now “relatively easy to start a new MTF” and that one could be installed and running within six to nine months. The hearing was held on 21 July, but the summary was only published on 19 August.
“Should the merger cause any competitive concerns, then a new MTF could be rapidly established to restore competition,” read a summary of the LSEG's evidence.
The LSEG acquired a majority stake in Turquoise in February 2010, with the remaining equity divided among 12 of the largest investment banks, including its seven founding brokers. The summary document also noted that Turquoise's cost base prior to its acquisition by the LSEG was around £18 million per year, compared with £15-16 million for Chi-X Europe and £10-11 million for BATS Europe.
According to figures from Thomson Reuters Equity Market Share Reporter, the LSE accounted for 46.6% of trading turnover in FTSE 100 stocks in July. Chi-X Europe was the second largest trading venue for UK blue chips with a market share of 27.5%, followed by Turquoise (8.4%) and BATS Europe (7.8%).
IMA backing
In a written statement given to the Commission last month, UK buy-side trade body the IMA – whose affiliates manage a total of around £3.4 trillion in assets – said its members were broadly in favour of the merger.
“IMA members currently believe that fragmentation has actually led to higher search costs for them and therefore believe that fewer venues might be a positive development,” read the IMA statement. “The concern is how financially sustainable many of these smaller venues are in the long term with further consolidation viewed as likely. The BATS/Chi-X merger is therefore likely to result in a financially strong and competitive combination.”
The IMA added that it did not expect the merger to have a negative impact on trading costs.
BATS Global Markets, the parent company of BATS Europe, made an initial approach to buy Chi-X Europe, whose largest shareholder is agency broker Instinet, in September 2010. The two parties entered exclusive negotiations in December. According to BATS Global Markets' IPO filing in early May, the deal is worth around US$305 million, with the possibility of an additional US$65 million in cash given to Chi-X Europe's shareholders in Q3 2012 if certain market share benchmarks are met. Chi-X Europe made a profit of £798,000 last year, the only MTF to have reported a profit.
At the end of June, the UK's Office of Fair Trading referred the deal to the Commission, on grounds that if the two MTFs continued to operate independently, they “would compete more strongly against each other”. The Commission is expected to report its findings by 2 December.
If and when approval is received, BATS Global Markets intends for the new entity to retain the existing dark and lit order books of each MTF. Currently BATS Europe CEO Mark Hemsley would lead the new entity, with Chi-X Europe CEO Alasdair Haynes expected to step down after a transition period.