Second-Largest US Stock Exchange in the Making? - Analyst Blog
27 Agosto 2013 - 11:05PM
Zacks
While the merger of NYSE Euronext Inc. (NYX)
and IntercontinentalExchange Inc. (ICE) is in the
advanced stages of culmination, the latest merger pact between BATS
Global Markets Inc. and Direct Edge Holdings is the next
potentially strong business combination in the US to have snatched
the limelight.
Although the terms of the deal remain undisclosed, the merger
between BATS and Direct Edge is expected to close by the first half
of 2014, once the regulatory approvals are attained.
Based in Kansas and formed in 2005, Better Alternative Trading
System (BATS) is the third largest securities exchange in the US
that operates through the BZX Exchange and the BYX Exchange,
accounting for about 12% of total equity volumes in the US. Apart
from equity trading, BATS offers market data and listing services.
It is also the largest pan-European equities trading hub with
multilateral trading facility, operating as BATS Chi-X Europe.
On the other hand, New Jersey-based Direct Edge ranks just next
to BATS and operates via two stock exchange platforms − EDGA
Exchange and EDGX Exchange. Meanwhile, both BATS and Direct Edge
are held by consortiums of investment banks and high-frequency
trading companies such as JP Morgan Chase &
Co. (JPM) and Goldman Sachs Group Inc.
(GS).
Opportunities Galore
The companies in the merger intend to expand the listing
business and market data offerings in the US. Furthermore, BATS and
Direct Edge seek to capitalize on the fresh opportunities in the
underpenetrated markets of Canada and Japan.
We believe the effect of the potential merger on the global
markets is likely to be significant as it would raise price
competition in the equities markets of the US. The merger is likely
to benefit from the economies of scale as the parties aim to lower
cost of expensive technology from the amalgamation of the four
exchanges.
Further, this merger is expected to gain competitive edge over
other exchange giants such as NYSE and Nasdaq OMX Group
Inc. (NDAQ) through strong volumes generation. Currently
BATS holds a market share of about 10% in terms trading volumes,
while Direct Edge owns about 11%. Accordingly, the merged company
is projected to be only second to NYSE, which has 23% stake in the
market, beating Nasdaq (holding 18% market share) and CBOE
Holdings Inc. (CBOE), among others.
Challenges Ahead
However, the proposed merger has its share of challenges too,
the primary being controlling costs and handling technical
glitches. While a roar of merger and acquisition activities were
witnessed in the past couple of years, most of them never saw the
light due to the regulatory and operational snags. BATS is also
facing diminishing volumes for over 4 years now and its bid for an
initial public offering (IPO) also failed last year.
Nevertheless, Hong Kong Exchanges & Clearing Ltd. bought the
London Metal Exchange Ltd. for $2.2 billion last year, while Tokyo
Stock Exchange merged with Osaka Securities Exchange to diversify
into derivatives early this year.
It’s a waiting game now to find out if the merged entity will be
able to sustain the competition as the much-awaited $10.2 billion
merger between NYSE and IntercontinentalExchange may create
additional competitive pressure in the market. Thus, we remain on
the sidelines to analyze the future of this merger amid current
market conditions.
CBOE HOLDINGS (CBOE): Free Stock Analysis Report
GOLDMAN SACHS (GS): Free Stock Analysis Report
INTERCONTINENTL (ICE): Free Stock Analysis Report
JPMORGAN CHASE (JPM): Free Stock Analysis Report
NASDAQ OMX GRP (NDAQ): Free Stock Analysis Report
NYSE EURONEXT (NYX): Free Stock Analysis Report
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