NYX Nyse Euronext

The potential merger of NYSE Euronext (NYX) and Deutsche Boerse AG (DB1.XE) has cast uncertainty on the future ownership of one of the Big Board's fiercest competitors.

Direct Edge, an insurgent electronic stock exchange operator based in Jersey City, N.J., is nearly one-third owned by the International Securities Exchange, the U.S. options market owned by Deutsche Boerse.

A combination between NYSE Euronext and Deutsche Boerse would effectively make the merged entity Direct Edge's biggest shareholder, with smaller positions held by a consortium of banks and trading firms.

The choices would be for the as-yet unnamed NYSE Euronext-Deutsche Boerse parent to sell its stake, purchase a bigger share in the company or let it continue to run as-is, home to 10.7% of all U.S. stock-trading activity in January.

Adding Direct Edge's volume to that held on NYSE Euronext's U.S. stock markets would total about 37.4% of the U.S. market--unlikely to raise any issues with regulators, according to Patrick O'Shaughnessy, analyst with Raymond James.

"Would it want to sell its stake? I suspect not," he said. "I think Deutsche Boerse is comfortable having that position, because it lets them hedge their market share a little bit."

Representatives of Direct Edge and the International Securities Exchange declined comment.

The ownership picture is complicated. The International Securities Exchange, or ISE, owns 31.5% of Direct Edge following a late 2008 deal that saw Direct Edge take ownership of ISE's equities market.

The ISE in turn is owned by Eurex, the derivatives market jointly operated by Deutsche Boerse and SIX Swiss Exchange Ltd. The latter group maintains a 15% economic interest in Eurex.

Alongside ISE's stake, Knight Capital Group (KCG), Goldman Sachs Group (GS), Citadel LLC and JPMorgan Chase & Co. (JPM) also have ownership in Direct Edge.

A combined NYSE-Deutsche Boerse could try to absorb Direct Edge's two electronic markets, which secured exchange status last year, into its U.S. equities trading business and take over operations.

But it's more likely that Direct Edge will continue to operate as it has rather than become two more stock exchanges under the NYSE banner, according to Adam Sussman, director of research at Tabb Group.

"When exchanges purchase some of their direct competition, they tend to keep those platforms running," Sussman said.

Rules governing U.S. share-trading have built competition into the structure of the market, said Sussman, making it difficult for any one exchange operator to behave in a monopolistic fashion. In the U.S. there are 13 separate stock exchanges and 27 more entities operating private trading venues, according to estimates from Tabb, a research firm.

O'Shaughnessy said that an initial public offering--something Direct Edge Chief Executive William O'Brien has targeted as a possible goal for 2011--could remain a possibility for the company.

-By Jacob Bunge, Dow Jones Newswires; 312-750-4117; jacob.bunge@dowjones.com

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