The Evil Empire: BATS and Direct Edge Agree to a Groundbreaking Merger

By Bryan Wiener Early next year, assuming that the ineptitude of the US regulatory system stands, the two largest US non-NYSE or NASDAQ stock exchanges will merge in a deal that has yet to be defined financially. The two exchanges, each of which trade approximately 11% of the average daily volume in the US equity space, will align under the name BATS and continue to operate BZX, BYX, EDGA and EDGX exchanges. Due to the fact that US equity volume has decreased dramatically since the banking crisis, it makes sense that the former foes would strike a deal to become the second largest exchange by volume in an effort to create economies of scale. According to Joe Ratterman, the current and future CEO of BATS, in a Reuters article on August 26, 2013, the combined exchange will utilize its combined resources and technologies to successfully re-enter the stock listing business, one that BATS completely whiffed on when its highly publicized self-listing pilot blew up in its face not too long ago. Additionally, Ratterman anticipates the exchange conglomerate to fully enter the lucrative data vending business, which produced $345 million and $357 million in revenue for the NYSE and NASDAQ , respectively last year. There was some level of speculation surrounding the recent purchase of the NYSE by the Intercontinental Commodities Exchange (ICE) as to whether or not European Union regulators would approve the transaction. According to a Bloomberg article on June 24, 2013, the looming anti-trust issue was resolved by EU authorities as they concluded that the “NYX and ICE are not direct competitors in the markets concerned and would continue to face competition from a number of other competitors.” Therefore, based upon this statement, EU regulators should in no way bless this union between BATS and Direct Edge. These two exchanges are in direct competition with one another in volume, pricing and customer base, as both are HFT havens that compete for non-NYSE/NASDAQ volume. The US stock/option market bore witness to the 2006 NYSE merger with Archipelago (Arca, which bought the Pacific Stock Exchange in 2005) and merged with the AMEX in 2008 to add an additional option/stock trading venue. In the period 2007-2008, NASDAQ bought the PHLX option exchange and was granted its own option trading venue by the SEC. There is a case for the argument that the differences in fee structure nullify competition, but if that is the only justification the defense is weak. There are obviously cultural and economic differences between the US and EU, but that should not justify the differences in how the two regulate security exchanges. European Union regulators would surely not allow BATS and Direct Edge to merge given their stance on the ICE purchase of NYSE Euronext. The SEC on the other hand will probably sanction the transaction without blinking an eye. Allowing two exchanges that are the main trading venues for HFT to combine forces is so blindly ignorant it really tells something about the ineptitude of the SEC. BATS was created by David Cummings, who also created the HFT firm Tradebot. It is outrageous that, in this current “___ Crash” environment, the SEC does not have a heavier hand in matters involving exchange mergers and acquisitions. Volume is the catalyst and most of the volume in the US is derived from HFT. The fact is, either the SEC does not know right from wrong or they are turning a blind eye so that HFT can stick around and, therefore, exchanges can survive today's low volumes. Either way clearly illustrates how irresponsible the US regulatory system is.