CBOE Holdings, the US exchange best known for its Vix volatility products, has pounced on a challenger that was eating into its market share with a $3.2bn takeover deal to buy Bats Global Markets.
The agreement is the latest in a series of powerful consolidation moves rippling across the global exchanges industry as rivals look to strengthen their grip on specific markets and strip out redundant technology costs.
The deal will place Chicago-based CBOE back ahead of rival Nasdaq in US options market share and move it into a range of new offerings, including equities where Bats ranks second in daily volumes having ended the duopoly of the once-dominant New York Stock Exchange and Nasdaq.
It will reduce CBOE’s almost uniform reliance on the success of its proprietary Vix and S&P 500 index options contracts, which have become some of the most used products in global trading.
CBOE shares are down 3.75 per cent to $67.72
“We are the product innovator in the space. Bats is the low-cost disrupter in this space. The data spun off their exchanges will feed perfectly into our growth and the industry’s move into more sophisticated products and strategies,” said Ed Tilly, a long-serving executive at CBOE and its chief executive since 2013.
The transaction values shares in Bats at $32.50 and a 22.5 per cent premium to its share price before news of the talks leaked late last week. The offer is comprised of 31 per cent cash and the remainder in CBOE stock.
For Bats, the deal marks the end of its remarkable ascent from an upstart, backed by global banks, that catered to high-frequency trading companies, which applied algorithms and technology to turn equities trading from a business handled by phone brokers into a game of millisecond execution.
Based in Kansas, Better Alternative Trading Systems was launched by Dave Cummings in 2005 after he left his speed-trading company Tradebot to build the business. To this day, its culture, rooted in the Baptist faith, maintains a zeal that puts it in stark contrast to its Wall Street peers.
Over time, Mr Cummings stepped back from the business, which was renamed Bats, as it turned into a disruptive force not only in equities but in areas such as foreign exchange trading, exchange traded products, stock listings and data services. Bats also established a footprint in Europe, where it is the largest equities exchange operator.
“Bats was not for sale. [We were] not running an auction but we found a strategic option that was unparalleled,” said Chris Concannon, a former Nasdaq and Virtu Financial executive who was brought in to run Bats in March 2015.
Both companies have agreed to pay a $110m fee if they elect to walk away from a deal.
Mr Tilly will remain chief executive, while Mr Concannon will become president. Bats executive Chris Isaacson will serve as the chief information officer at the combined group, while CBOE’s finance director Alan Dean will keep his role.
Three directors from Bats will join CBOE’s board, which will temporarily expand to 14 members. CBOE said it will maintain its dividend but suspend its share repurchase programme and raise $1.65bn in new debt to fund the transaction.
Peter Lenardos, analyst at RBC Capital Markets, said: “In our view, this deal makes little sense for CBOE, as it significantly increases its exposure to highly competitive asset classes that are in secular declines, such as multi-listed options, US equities and European equities.”
This year has already seen two high-profile exchange deals, including Nasdaq’s $1.1bn agreement to buy International Securities Exchange, the US options business of Deutsche Börse. The London Stock Exchange Group and Deutsche Börse have also agreed a £21bn all-stock combination.
Bats itself benefited from exchange consolidation when it merged with its smaller competitor in equities trading, Direct Edge, which was also backed by a number of global banks, in 2013. That deal came just over a year after Bats was forced to scrap a listing of its shares on its own exchange because of technical glitches.
This year, Bats successfully listed its shares on its exchange in an IPO that raised $253m and valued the business at $1.8bn.