BATS Global Markets, the Kansas-based market operator, has received provisional approval from the UK’s Competition Commission, to complete its acquisition of pan-European multilateral trading facility (MTF) Chi-X Europe.
“We are pleased by the Competition Commission’s provisional findings, which if reflected in the final report, will clear the way for the creation of an even stronger competitor to Europe’s incumbent exchanges,” said Joe Ratterman, chairman and CEO of BATS Global Markets.
The transaction is scheduled for completion by the end of this year following the publication of the Competition Commission’s final report, which is expected on 2 December.
The deal will lead to the combination of Chi-X Europe with BATS Europe, the MTF operated by BATS Global Markets. The deal was referred to the Competition Commission by the UK’s Office of Fair Trading in June, on grounds that if the two MTFs continued to operate independently, they “would compete more strongly against each other”.
However in a summary of its provisional findings, the Commission concluded that customers of the merged entity would be able to take their business elsewhere or sponsor a new entrant should the BATS/Chi-X MTF raise its fees or worsen service quality.
“Any MTF needs a critical mass of customers to be successful in order to provide the liquidity that will then in turn attract other customers,” said Malcolm Nicholson, chairman of the Competition Commission’s BATS/Chi-X inquiry group. “The two exchanges share a very similar customer base and so are dependent on retaining the business of a limited number of large financial institutions. Such institutions could quickly spot any rise in costs or fall in service quality and would have the ability to take their business elsewhere with relative ease.”
After the deal’s completion, the new firm will be led by current BATS Europe CEO Mark Hemsley, with Chi-X chief Alasdair Haynes due to step down after a transition period.
The new entity is also expected to retain the existing dark and lit order books of each MTF, which would help it minimise market share loss and enable the firm to offer clients flexibility on fees.
Chi-X Europe will move over to BATS Europe’s technology platform early next year. BATS Europe migrated its data centre to an Equinix facility in Slough, just outside London, on 10 October 2011.
Under the terms of the deal – as stated in BATS Global Markets IPO filing in early May 2011 – Chi-X Europe’s shareholders will receive approximately 4.4 million newly issued shares of BATS Global Markets stock and approximately US$36 million in cash. BATS Global Markets could also pay up to an additional US$65 million in cash to Chi-X Europe’s shareholders in the third quarter of 2012, if certain market share benchmarks are met.
According to press reports, BATS could also cut around 50% of Chi-X Europe staff following the completion of the deal, primarily from its technology department. Chi-X Europe’s director of regulation Denzil Jenkins has already been snapped up by the London Stock Exchange and will start his new role as the bourse’s head of compliance and regulation in early 2012.
In September, BATS Europe had a European equity market share of 5.3% compared with 18.7% for Chi-X Europe – which was the largest trading venue in the region – according to figures from Thomson Reuters Equity Market Share Reporter.