BATS Global Markets and Direct Edge Holdings agreed to merge, uniting two of the biggest U.S. exchange operators amid a four-year decline in volume.
The third- and fourth-largest equity market owners said the transaction will close in the first half of 2014. Joe Ratterman, the CEO of BATS, will keep that role at the combined firm, while Direct Edge CEO William O'Brien will be president. Financial details weren't disclosed.
Formed by some of the fastest traders on Wall Street, the closely held companies have watched volume dry up in the U.S., cutting profits at the proprietary trading firms they count among their biggest customers. Shares changing hands on all U.S. exchanges have fallen 36% since 2009 to 6.3 billion shares a day in 2013 and profits for high-frequency traders slipped 80%, according to data compiled by Bloomberg and Rosenblatt Securities.
“Volume is weak,” said Dan Veru, chief investment officer at Palisade Capital Management who helps oversee $4.5 billion, in a phone interview. “That's been the trend going on for quite some time. So unless you have real scale, it's difficult to compete. Mergers like this probably create some scale.”
The companies' four exchanges will keep operating, using BATS' technology, according to a statement. The combination will be headquartered near Kansas City, Mo. BATS is based in Lenexa, Kan.
BATS, an acronym for Better Alternative Trading System, started trading in 2006, aiming to match the incumbent exchanges on speed and beat them on prices. Seven years later, the firm's daily average U.S. equity market share is about 10%, according to data from Tabb Group. That compares to averages of 23% at NYSE Euronext and 18% at Nasdaq OMX Group. Direct Edge has about 11%, Tabb said.
The deal comes as IntercontinentalExchange prepares to complete the acquisition of NYSE Euronext, which owns the New York Stock Exchange, the oldest U.S. bourse. Combining BATS and Direct Edge would make them the second-biggest market by volume.
BATS, which tried and failed to go public last year, was founded in 2005 by high-frequency trader Dave Cummings of Tradebot Systems and, along with Direct Edge, helped dismantle the duopoly on American stocks that was enjoyed by the New York Stock Exchange and the Nasdaq Stock Market.