Dual-order book limits impact of Chi-X/BATS deal for buy-side

Although the merger between Chi-X Europe and BATS Europe will shake up the hierarchy of European trading venues, the planned dual order book model of the combined multilateral trading facility (MTF) means its significance for the buy-side will be limited.

BATS Global Markets' takeover of Chi-X Europe, which will be merged with rival MTF BATS Europe, had been expected to gain regulatory approval today by sources close to the situation, however a spokesperson for BATS has said that the process is ongoing, with approval hoped for in the next couple of weeks. A detailed plan for the integration will be published subsequently.

The deal, the terms of which have not been disclosed, is believed to value Chi-X Europe at US$360 million and BATS Global Markets at US$1.2 billion. It is expected that it will be part equity and part earn out.

In March Chi-X Europe was the largest single venue for pan-European equity trading with a market share of 16.6%, while BATS Europe was eighth-largest with a market share of 5.7%, according to market data provider Thomson Reuters. Combined, the MTFs would have the second largest market in Europe, behind the London Stock Exchange Group (LSEG), whose London Stock Exchange, Turquoise and Borsa Italiana, had a joint market share in March of 23.5%, and ahead of NYSE Euronext's Paris, Amsterdam, Brussels, Lisbon and NYSE Arca markets which currently hold 17.24%.

However the plan to run two separate displayed order books, revealed on 18 February by BATS Europe's CEO Mark Hemsley, means that the combined entity is unlikely to leak much market share from market participants that might otherwise look to diversify their order flow from a single BATS-Chi-X order book. One broker said that as long as the split order books did lead to fewer competitive pricing promotions, they should have no further effect.

“We continue to go where the liquidity is on a name-by-name basis,” says Bradley Duke, managing director, Europe at broker Knight Capital. “That's the way our smart order router is programmed so for us its business is usual.”

Market share for the two MTFs has remained almost unchanged since the deal was announced, although BATS Europe's market share of trading in FTSE 100 shares has declined slightly, from 6.58% in January to 5.05% in March, according to trading technology supplier Fidessa which includes OTC trades, or from 12.04% in January to 9.58% in March according to BATS Europe's own figures, which measures purely lit-book trades.

The commoditisation of the equities markets has led traditional stock exchanges look to look for alternative revenue streams. Dominic Cerutti, president and deputy CEO of NYSE Euronext, wrote to the European Parliament stating that the merger between Deutsche Börse/NYSE Euronext was “among the possible responses to the need for a competitive rebalancing between regulated markets and alternative platforms” as secondary market provide a declining proportion of revenues for his own firm – falling from 51% in 2008 to 20% in 2010.

The London Stock Exchange and Canadian market operator TMX, have also cited potential alternative revenue streams as a driver for their planned merger, with derivatives and new listings opportunities high on the list.

On 29 March BATS Global Markets, which has approximately 11% market share in US equity trading, announced plans to open a US listing venue in Q4 2011, and it is expected to follow suit in Europe. Chi-X Europe has said it will offer derivatives trading, based on indices developed by Russell Investments, the US-based investment services and equity indices provider, but it has refused to provide a timeframe for the roll-out of the offering.