It has been known as the small, unheralded exchange from Chicago but at a stroke CBOE Holdings has forced a re-evaluation of its standing in the market.

The surprise $3.2bn deal to buy Bats Global Markets is the largest in the CBOE’s 43-year history and momentarily draws the spotlight away from its crosstown rival CME Group, the world’s largest futures exchange.


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And despite the low-key approach from both sides, it is also a deal that promises to redraw the exchange industry landscape in North America.

According to the managements, a combination is about putting together the CBOE’s popular and long-coveted dominance in trading Vix and S&P 500 options with Bats’ acknowledged cutting-edge technology.

“We are the product innovator in the space,” says Ed Tilly, chief executive of CBOE. “Bats is the low-cost disrupter in this space. Together, and with the data spun off their exchanges, feeds perfectly into our growth and the industry’s move into more sophisticated strategies.”

Yet as analysts and rival industry executives are aware, it is a more transformational deal than that.

It moves CBOE out of the close-knit futures and options world of Chicago, the self-styled “trading capital of the world”, and brings it for the first time the unfamiliar territory of US and European cash equities, exchange traded funds and foreign exchange.

Kansas-based Bats, once a start-up backed by global banks and launched by a former high-speed trader, has expanded also through M&A to overtake Nasdaq in US share trading with a 20 per cent market share, second to the New York Stock Exchange. It also has a fifth of all European equities. The group went public in April.

“CBOE is buying growth, scale and diversification,” says Richard Repetto, an analyst at Sandler O’Neill in New York. “You can spread your revenues over a smaller cost base. You don’t have to depend on any single set of products.”

For market participants, the deal may be felt most keenly in the US options market, where Bats’s entry five years ago precipitated a fierce competition for customers. That hurt industry pricing and has driven consolidation. This year Nasdaq
bought the International Securities Exchange, which operates three equity options markets, from Deutsche Börse. Analysts wonder if fewer parent companies would mute the fierce competition.

This opens the door for them to charge a lot more for market data. Bats has not monetised its market data and infrastructure as significantly as Nasdaq and NYSE. That is probably worth the whole price of admission

– Larry Tabb, co-founder of Tabb Group

“The options market could change a bit. The deal probably marks a bottom in terms of multi-list options pricing. Bats has been the primary driver of compression over the past five years,” says Andrew Bond, an analyst at RBC Capital Markets.

Multi-list options are those on single stocks and ETFs versus index options where CBOE has a proprietary business. Once the CBOE-BATS deal closes, the two parent companies combined will control 10 out of 14 exchanges, according to Tabb Group, a capital markets consultancy.

The two companies have few other overlaps. “In cash equities I don’t think anything really changes — they don’t operate in the same businesses at all,” says Christian Bolu, an analyst at Credit Suisse. The same applies in foreign exchange. For that reason, few expect the deal to hit antitrust issues.

Both realised they were smaller niche exchanges compared to the two largest exchanges, CME and ICE, which both had market capitalisations in excess of $30bn. A CBOE-Bats tie-up is not only likely to skirt competition issues their larger rivals may face, it will give them scale. The combined group will have a market capitalisation of more than $8bn.

“There are limits to the exchange consolidation, there are nationalistic limits,” says Chris Concannon, Bats chief executive. “Obviously, when you look at the exchange business, they are multibillion companies now . . . but clearly there are cycles of consolidation that occur and you have to remember there are new entrants into the market.”

But in one respect the deal resembles the growth path taken by another US exchange that went from start-up to one of the world’s largest in just 16 years — ICE.

ICE has switched focus in recent years to selling lucrative data to investors. It has a mixture of equities, commodities and futures on one platform. Some think the new exchange will do the same.

“This opens the door for them to charge a lot more for market data,” says Larry Tabb, co-founder of Tabb Group. “Bats has not monetised its market data and infrastructure as significantly as Nasdaq and NYSE. That is probably worth the whole price of admission.”

Additional reporting by Arash Massoudi in London

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