BATS completes Chi-X deal, confirms dual order book strategy

US market operator BATS Global Markets has reached a definitive agreement to buy pan-European multilateral trading facility Chi-X Europe.
By None

US market operator BATS Global Markets has reached a definitive agreement to buy pan-European multilateral trading facility (MTF) Chi-X Europe.

The deal, still subject to approval by the Financial Services Authority, is due to close in Q2 2011. It will combine Chi-X Europe with rival MTF BATS Europe, creating the largest pan-European alternative trading venue. Integration is expected to be completed by the end of 2011. The management structure of the new company has not yet been finalised.

Financial terms of the deal were not disclosed, but the deal will be part equity, part earn out. The transaction is believed to value Chi-X Europe at US$360 million and BATS Global Markets at US$1.2 billion, with BATS paying an initial US$300 million in cash.

The majority of Chi-X Europe shareholders will take a stake in the combined entity. Chi-X Europe was launched in April 2007 by agency broker Instinet, which retained a one-third stake in the MTF ahead of the deal, with minority shareholdings taken by broker-dealers and market making firms. BATS Europe was launched in October 2008.

According to Mark Hemsley, CEO of BATS Europe, the new entity – named BATS Chi-X Europe – will run on BATS' existing technology and is likely to retain two separate displayed order books that will give customers choice on trading fees.

“Customers of both organisations have indicated they like the idea of having execution pricing flexibility through multiple order books,” Hemsley told “Different customers are sensitive to different pricing points so it's an excellent opportunity to provide an improved joint offering. There will also be reduced costs in terms of access because of a common technical environment.”

In October last year, BATS Global Markets launched its second US stock exchange, BYX, which complements its existing BZX platform by offering a different execution pricing model.

By operating two separate order books, the combined entity aims to limit the risk of market share leakage, which could occur given that both MTFs currently share many of the same trading members.

According to figures from Thomson Reuters, Chi-X Europe traded €141.96 billion in January 2011, representing a 16.4% share of pan-European market activity. BATS Europe traded €55.93 billion in January, accounting for 6.4% of trading in the region.

The combined entity's dark pool strategy has not been finalised, but Hemsley said that a single dark pool with a minimum order or execution size is among the options being considered.

Despite the spate of merger activity in the last few weeks – including deals between Deutsche Börse and NYSE Euronext and the London Stock Exchange Group (LSEG) and Canadian market group TMX – Hemsley believes BATS Chi-X Europe will provide greater value for members on a pan-European basis.

“The rationale for the deal is now perhaps stronger given the recent merger activity between other exchanges,” he said. “None of the deals announced over the last few weeks offer a strong pan-European market offering, except for a Chi-X Europe and BATS Europe combination. We will offer deeper available liquidity, routing capabilities, a single interface, rationalised communications infrastructure and a single data centre. A whole range of benefits will accrue to customers.”

Hemsley confirmed that BATS Chi-X Europe will move into derivatives to challenge the dominance of NYSE Euronext's Liffe and Eurex, the derivatives market jointly owned by Deutsche Börse and SIX Swiss Exchange.

“The debate around derivatives has escalated following the Deutsche Börse and NYSE Euronext merger,” he said. “There has always has been strong demand for a competitor to these organisations in Europe and I think those calls will now get stronger. We already have a very good derivatives platform that we can bring to bear in Europe.”

BATS Global Markets launched a US options market in May last year, which offers trading based on over 2,100 underlying cash equity securities.

Turquoise, the LSEG-owned MTF, plans to start trading derivatives in Q2 this year. CEO Xavier Rolet described the current market as “bereft of competition” during his firm's results presentation last November.

BATS entered into exclusive discussions with Chi-X Europe on 22 December last year.