NYX Nyse Euronext

The U.K. Competition Commission on Thursday "provisionally cleared" the proposed $305 million acquisition of pan-European trading platform Chi-X Europe by Kansas City-based BATS Global Markets.

In its provisional findings, the commission said that "customers of both exchanges [BATS and Chi-X] would have the power to prevent any attempt by the merged company to raise trading fees or worsen service quality, by taking or threatening to take their business elsewhere or even potentially sponsoring new entry by a competitor as has happened previously in this sector."

Both companies operate so-called multilateral trading facilities, which enable market participants such as investment banks, brokers and dealers to trade equities through a single platform as an alternative to trading on national exchanges such as the London Stock Exchange Group PLC (LSE.LN).

"Although Chi-X and BATS have up to now targeted their efforts at winning business from the LSE, these are relatively new businesses and so the merger of two such similar operations could significantly reduce competition. However, our provisional view is that their customers have sufficient power to maintain competition in the market," said Malcolm Nicholson, chairman of the BATS/Chi-X Inquiry Group.

"The customers of both these exchanges are in a particularly powerful position to combat any attempt by the merged company to raise trading fees, reduce service quality or otherwise exploit any loss of competition," he said.

"The two exchanges share a very similar customer base and so are dependent on retaining the business of a limited number of large financial institutions. Such institutions could quickly spot any rise in costs or fall in service quality and would have the ability to take their business elsewhere with relative ease," Nicholson said.

The commission said it will consider responses to its provisional findings before publishing its final verdict which is due on Dec 2. It has an option to extend that by eight weeks.

"In the vast majority of cases, the provisional decision will reflect the final decision," said Marc Israel, partner with Macfarlanes LLP, who advised BATS in the matter.

BATS and Chi-X said they welcome the commission's provisional clearance.

"We are pleased by the Competition Commission's provisional findings, which if reflected in the final report, will clear the way for the creation of an even stronger competitor to Europe's incumbent exchanges," said Joe Ratterman, chairman and chief executive of BATS Global Markets.

The two companies said they expect their transaction to be completed by year-end.

On Monday, Chi-X Europe CEO Alasdair Haynes told an exchange conference that he will step down once the deal is completed.

The BATS-Chi-X deal was announced in February and was initially expected to close before the end of June. It was seen as one of the least contentious among a raft of other cross-border exchange mergers.

The deal involves BATS acquiring Chi-X Europe for $305 million, according to filings with the U.S. Securities and Exchange Commission.

The deal was initiated in the summer of 2010 when BATS approached Chi-X Europe about a merger, which drew in other bidders, according to a report by the U.K. antitrust authorities. The owners of Chi-X Europe went with BATS because the two companies' business models align as challengers to big, incumbent exchanges, the report said.

The combined group will be called BATS Chi-X Europe and is looking into launching a derivatives trading platform to challenge the strong hold of Deutsche Boerse AG (DB1.XE) and NYSE Euronext (NYX) on the Continent's derivatives market.

Deutsche Boerse and NYSE Euronext have also agreed on a tie-up and are expected to soon reply to the European Commission's statement of objections against their deal.

-By Vladimir Guevarra, Dow Jones Newswires;

Tel. +44 (0) 2078429486, vladimir.guevarra@dowjones.com

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