For years CBOE Holdings, the exchange group which operates the largest US options exchange, has had to watch its rivals from across the street make acquisition after acquisition. For years it had to deal with persistent rumours that it would eventually be taken over by the CME.
Yet in September the markets were stunned when it was revealed that CBOE will acquire Bats Global Markets in a $3.2 billion deal, creating a new global exchange behemoth to challenge the likes of ICE, CME Group and Nasdaq.
The tie-up would bring the largest US equity and index options market with the largest pan-European equities market by market share, and the second largest US stock market by shares traded.
Kansas-based Bats Global Markets was founded by a team including now-chairman Joe Ratterman in 2005. In 2008 it opened in European equities and now operates the largest European equities venue by market share. In 2010, it ventured into the US options market, and now operates two options exchanges. The exchange group is the largest destination for ETF trading globally, and went public in April this year.
The acquisition for CBOE moves the exchange group out of the confined space of the Chicago derivatives scene and into new global product areas.
Certainly this mega-merger is set have significant implications for both companies. We sit down with CBOE Holding’s chief strategy officer and head of corporate initiatives, John Deters, to discuss the reasons behind the merger and what is in store for the two companies.
Joe Parsons: Why is now the right time for CBOE to expand with the Bats deal?
John Deters: When I think about timing with the Bats deal, we were coming at it from the point of view that both CBOE and Bats have strong growing franchises and very healthy growth records, so we asked, ‘what opportunities are there to accelerate the strategies we have in place?’ CBOE came to the conclusion that Bats represented the best opportunity to help us do that. We are aiming to complete the acquisition in the first half of next year, subject to shareholder and regulatory clearance and approval.
What was the rationale behind the deal?
It diversifies our product offering, so we extend beyond US equity derivatives and into US and European stocks, exchange-traded funds (ETFs), and also US, European and Asian FX trading. That is a very powerful diversification for us because those types of products have very little overlap with what we do today. We hope to be reaching new customers through their association with Bats’ current product offerings.
What areas of the deal excite you the most?
One opportunity for us is access to the vast ETF market and ways to interact with that product set. For example, we could use our existing index provider partnerships and marry those with Bats’ listing venues in the US and Europe.
We believe that passive investing is currently the largest investing trend. We believe investors will trade the package that makes the most sense for them, whether it is because of the way their infrastructure is set up or it is cheaper for them, so we don’t want to force them to trade in a futures/options package if an ETF is the best way to fit that passive strategy. This deal, given Bats’ position as a growing listing venue and the largest exchange for ETF trading, allows us to speak to that customer base.
In addition, it opens up new index opportunities. We have an active custom index business, and we are very excited about bringing that capability to the Bats customer base, the issuers and sponsors of ETFs that Bats has such fantastic relationships with.
Finally, in Europe we think about derivatives on equities and FX, which is a huge opportunity. We think delivering our capabilities in derivatives onto the Bats European platform is extremely important.
Will these products be jointly listed under the same brand?
The theme in this deal is streamlining trades and processes. The end-user is becoming much more global, the asset owners are becoming more global, and it is absurd for someone to have the same exposure replicated in two places but not be able to offset their margin positions or report in the same way. We plan to break down those barriers by having one technology platform underlying our marketplaces across the world. As long as the regulations allow it, we aim to make the trade processes as simple as possible.
How much of an opportunity will expanding in market data be?
In terms of market data and non-transactional revenue for CBOE, we stand to grow from 30% of total net revenues on a standalone basis to 40% in combination with Bats. A big part of that is Bats’ strong market data expertise—about half of Bats revenue is non-transactional. As investment strategies become more complex and more global, market data helps participants’ back-test strategies around global macro trading. This also relates to our engagement with ETFs as market data drives products such as ETFs.
Bats has had a tremendous amount of success with its pricing strategy on market data. We don’t want to turn away users because they feel the cost of market data is too high. It would be a disservice if we do that. Our expected approach will be to grow the pie by accessing new users and providing value-added market data products.
How will the expansion into ETFs cross over with your core listed derivatives offering?
We believe the new opportunities lie in Europe when it comes to derivatives on ETFs. The concept of an option on ETFs is a challenging one for European market participants — effectively it does not exist. We know that is a need that can be addressed because options on ETFs are strongly embraced in the US market. Whether that will be approached through a US-type product, but with different characteristics that meet European regulatory considerations, or through index-related products that give participants similar exposures is to be determined. It is an interesting opportunity to explore.
Is the end-goal a CBOE European exchange?
Bats already has an exchange registration. A European registered investment exchange (RIE) license is fairly flexible, and slightly different than one in the US, which is more specific to commodities or securities trading. The RIE allows for a broad range of products to be traded. It is now a question of gauging market demand, speaking to regulators about what other approvals are required, and the new product process.
What was the rationale behind your investments in CurveGlobal and Eris Exchange?
With CurveGlobal, you have a group of banks sitting around the table with us and the LSE with a blank sheet and an opportunity to create new products, clearing into a very logical CCP for fixed income products. So we loved that concept. Eris Exchange is built on products designed to solve problems around margin inefficiencies of traditional swaps products.
We have learned that if you have a product that is relevant to market participants in rates or FX, you have to go where those participants are. It is challenging to expect to list a product on an exchange that caters to one type of market participant and expect everyone else to connect. With those perspectives in mind, it made a lot of sense to make those two minority investments.