CBOE Holdings is in talks to acquire BATS Global Markets, according to people familiar with the matter.
It's a deal that would combine a 43-year-old Chicago firm that still runs trading pits where people buy and sell options with a fully electronic exchange.
“You're combining a premium product exchange with a scrappy upstart,” said Rich Repetto, an exchange analyst at Sandler O'Neill & Partners. “If both parties are motivated, they could successfully merge because there are plenty of areas where they don't conflict or overlap.”
An agreement could be announced within weeks, though no final decision has been made and the talks may still fall apart, the people said, asking not to be identified as the matter is private. A spokeswoman for BATS, which went public in April in a long-awaited initial public offering, declined to comment. A representative for CBOE didn't immediately respond to a request for comment.
Buying BATS would push CBOE beyond options and related futures contracts, a niche business — albeit a profitable one for the company — compared with the areas where BATS operates. BATS is the second-biggest exchange operator in U.S. stocks, the largest in European equities and last year got into the $5.1-trillion-a-day currencies business.
The two companies have vastly different roots. BATS was founded in 2005 by high-speed trader David Cummings of Tradebot Systems, and its trading software is regarded as among the industry's best. CBOE still runs open-outcry pits in Chicago, a throwback to an era when people drove trading — though it does run the all-electronic C2 exchange, too. BATS runs a relatively lean operation because it operates in commoditized businesses, whereas CBOE enjoys monopolies in two key products: S&P 500 and VIX options.
CBOE would reclaim its market-share lead in U.S. options trading by purchasing BATS, edging out Nasdaq. CBOE's two exchanges plus BATS's two options markets handle about 38% of industry volume. Nasdaq, which bought three options markets from Deutsche Boerse this year, handles about 36%.
Acquiring BATS would give CBOE a foothold in the fast-growing business of exchange-traded funds. BATS CEO Chris Concannon predicted this year that ETF assets will grow fivefold by 2026 from about $2.7 trillion currently. CBOE already trades options linked to ETFs, but a deal with BATS would mean it could operate a venue for buying and selling the funds themselves.
The talks between CBOE and BATS come as two of the world's biggest exchanges, Deutsche Boerse and London Stock Exchange Group Plc, try to combine. “It's not unexpected to see continued activity in the exchange space,” said Andy Nybo, a partner at Tabb Group. “Global exchanges as well as regional exchanges need to expand their footprint to grow their revenues, grow their business.”
This wouldn't be CBOE's first foray into U.S. stocks. It owned stakes in the CBOE Stock Exchange, which is now defunct, and the National Stock Exchange, which it no longer owns.