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November 1, 2013

Strength in Unity

The chief executives of Direct Edge and BATS discuss the future of their soon-to-be merged exchange operation

By

Peter Chapman

The merger between BATS GlobalMarkets and Direct Edge Holdings is expected to close early next year and will bring together BATS's 164 employees with Direct Edge's 135. The merge won't alter the exchange landscape-the plan is to maintain all four of the operators' exchanges-but it could introduce competition on the market data front. When the two firms come together under the BATS name, Bill O'Brien, currently Direct Edge's chief executive officer, will take on the role of president. BATS's Joe Ratterman will become chief executive officer of the combined firm. The two answered a few questions for Traders Magazine.

Traders Magazine: Why merge? To cut costs?

Bill O'Brien: That isn't the main reason. There is always the ability to streamline operations when you bring two companies together. But it really started for me with the notion that together we could have a better set of products for the customer and help them lower their costs. Help them respond to their business challenges, as opposed to doing something for ourselves. Any good merger should start with that kind of industrial logic. Bringing these two companies together is a significant accelerant to our combined ability to serve the customer. It's clearly a case where together we can do that in a more powerful and accelerated way than either of us were doing on a stand-alone basis. That's why it's so powerful, as opposed to any sort of financial engineering or cost-cutting. 

 

Traders Magazine: Can you give us an example?

O'Brien: I'll give you a great example. Look at market data. The structure for market data consumption in this industry is really about 40 years old. The legacy exchanges have had data products where consumers are paying the same rates month after month after month. That's despite the fact that the relative value of that content continues to go down and the cost of producing the data also continues to go down. Direct Edge and BATS have each been making some pretty important inroads into that area. We've done really well with getting attribution on our data feed-meaning people quoting in their own name. About 10 percent of the orders on EDGX are executed on an attributed basis. So we're making inroads there. But when you put the two companies together and realize they have a content set that is bigger than Nasdaq's. You significantly accelerate the ability to bring competition to that market. You significantly expand the content choices available to the end user and lower his costs at the same time.

 

Traders Magazine: Why not merge the exchanges? Wouldn't a couple larger pools be more beneficial?