While the merger between BATS Global Markets and Direct Edge Holdings won’t alter the exchange landscape—the plan is to maintain all four of the operators’ exchanges—it could introduce competition on the market data front. Bill O’Brien, currently Direct Edge’s chief executive officer, will take on the role of president when the two firms come together under the BATS name early next year. He answered a few questions for Traders Magazine.
Traders: Why merge? To cut costs?
O’Brien: That isn’t the main reason. There is always the ability to streamline operations when you bring two companies together. But it really started for me with the notion that together we could have a better set of products for the customer and help them lower their costs. Help them respond to their business challenges as opposed to doing something for ourselves. Any good merger should start with that kind of industrial logic. Bringing these two companies together is a significant accelerant to our combined ability to serve the customer. It’s clearly a case where together we can do that in a more powerful and accelerated way than either of us were doing on a standalone basis. That’s why it’s so powerful as opposed to any sort of financial engineering or cost cutting.
Traders: Can you give us an example?
O’Brien: I’ll give you a great example. Look at market data. The structure for market data consumption in this industry is really about 40 years old. The legacy exchanges have had data products where consumers are paying the same rates month after month after month. That’s despite the fact that the relative value of that content continues to go down and the cost of producing the data also continues to go down. Direct Edge and Bats have each been making some pretty important inroads into that area. We’ve done really well with getting attribution on our data feed – meaning people quoting in their own name. About 10 percent of the orders on EDGX are executed on an attributed basis. So we’re making inroads there. But when you put the two companies together and realize that they have a content set that is bigger than Nasdaq’s…You significantly accelerate the ability to bring competition to that market. You significantly expand the content choices available to the end user and lower his costs at the same time.
Traders: Why not merge the exchanges? Wouldn’t a couple larger pools be more beneficial?
O’Brien: No. It might help the bottom line in the short term. But it would hurt the customer in the short, intermediate and long-term. We want to have as big a tent as possible. These four exchanges represent four materially different ecosystems that our customers benefit from. That’s why EDGX can be the No. 1 exchange destination for retail limit order flow and BATS-Z can be very powerful for electronic market makers. BATS-Y and EDGA each have their own unique ecosystems. That doesn’t mean any of them aren’t going to change over time. We’ll think that through and spend time listening to customers. We’ll certainly consolidate some of the operational backbone behind them. You’re not going to have four groups of people running all four exchanges. But by having those multiple platforms or brands or exchanges allows you to provide a continuum where users are really empowered to pick and choose on a trade-by-trade basis which platform offers the most value. Rather than take choices away from the customer by consolidation, we’ll do consolidation in the back.
Traders: Who will own the combined company? Mostly brokers? Will any party divest as a result of the deal?
O’Brien: The ownership structure will be a competitive differentiator and a strength for us. This is a merger – a share deal. Nobody is cashing out. We are recreating the mutualized exchange. The relationship between exchanges and its members has broken down in recent years. Not that for-profit is evil. Any good membership organization should run itself with that mindset. But when you have an ownership and governance structure where Goldman Sachs, Morgan Stanley, Credit Suisse, JP Morgan, Merrill Lynch, KCG, Citadel, Tradebot, Nomura and others can all come around the table and view themselves not just as customers, but partners and key stakeholders…This will keep us closer to the customer; more aligned with the customer. It will help us stay focused on the customer.
Traders: So, the majority ownership is brokers?
O’Brien: Yes. The large majority.
Traders: Finally, will this merger help grow the combined company’s market share?
O’Brien: I have never made a market share prediction and I’m certainly not going to start doing so today.
