Direct Edge and the International Securities Exchange, which operates the ISE Stock Exchange, today announced they would join forces to become a single U.S. equities market. The deal, which must be approved by the Securities and Exchange Commission, essentially swaps the ISE Stock Exchange for a 31.5 percent stake in Direct Edge.
William O’Brien, CEO of Direct Edge, said he expects the deal to hike the combined market’s matched market share to “double digits” in the next 12 to 18 months. In July, Direct Edge’s matched market share of U.S. consolidated volume for the two ECN markets it runs was 4.9 percent, while the ISE’s was reputed to be around 1 percent. Direct Edge’s bigger rivals are Nasdaq, the New York Stock Exchange, NYSE Arca, and BATS Trading, an ECN with twice its market share that will begin operating as an exchange in mid-October.
Gary Katz, president and chief executive of the ISE, said the ISE Stock Exchange and Direct Edge could “expand more quickly in the equities market together than either of us could alone.” The ISE owns 51 percent of the ISE Stock Exchange.
O’Brien told reporters this morning that Direct Edge will continue to pursue exchange status for its two ECN markets, EDGA and EDGX. The ISE deal, he said, would speed that process along by providing Direct Edge with exchange technology and infrastructure. Starting in the fourth quarter, Direct Edge will also quote to the ISE Stock Exchange instead of the National Stock Exchange.
When the deal closes, the ISE will become Direct Edge’s largest single owner, controlling nearly one-third of the company. Direct Edge’s current owners, which include Citadel Derivatives Group, Knight Capital Group and Goldman Sachs, will each own 19.9 percent. The SEC limits a broker-dealer’s ownership stake in an exchange to under 20 percent.
The ISE Stock Exchange will continue to operate as an exchange in the National Market System and will be run by the ISE until the planned deal closes, Katz said. Direct Edge will take operational control of the exchange once the deal concludes, which is expected to occur in the fourth quarter.
The ISE Stock Exchange will be “de-commissioned” once Direct Edge’s two exchange applications win approval from the SEC, Katz said. The partnership with Direct Edge now constitutes the ISE’s “strategic plan for the equities marketplace,” Katz said. “We’ve taken it as far as we could go independently.” O’Brien said the ISE’s customer base will complement the ECN’s current participants.
The value of the ISE’s investment in Direct Edge is approximately $123 million, including the stock exchange and additional planned investments in exchange technology. As part of the deal, 20 to 25 ISE employees in technology, operations and sales may move over to Direct Edge. The ISE will provide Direct Edge’s planned exchanges with regulatory, technology infrastructure, and data center services.
