The Jersey City-based stock exchange Direct Edge is merging with a rival exchange, Kansas City-based BATS Global Markets, the companies announced today.
The deal will vault the new company past Nasdaq to become the second-largest securities exchange operator in the United States, after the New York Stock Exchange Euronext, according to published reports.
Both Direct Edge and BATS will remain private companies. BATS attempted to go public in March 2012, but withdrew its IPO following a technical glitch; the challenge of how to manage technology in an age of high-speed trading made headlines just last Thursday, when a trading halt of more than three hours on Nasdaq was blamed on technical trouble.
Securities industry experts have credited Direct Edge with being a "disruptive force" on Wall Street, using a semi-mutual ownership structure and pricing competition to take market share from NYSE and Nasdaq. Direct Edge is owned by a consortium that includes affiliates of Citadel LLC, Goldman Sachs Group Inc., International Securities Exchange, JPMorgan Chase & Co. and KCG Holdings Inc.
In a statement, the companies said their definitive merger agreement will "bring together two customer-focused securities exchange operators under the BATS Global Markets enterprise to drive further innovation and better serve investors."
The exchanges said they won't disclose the financial terms of their deal, expected to close in the first half of 2014, subject to regulatory approvals. BATS CEO Joe Ratterman will keep that job, while Direct Edge CEO William O'Brien will be president of the merged company. Bryan Harkins, of Direct Edge, will join the senior executive team.
"This agreement is an important milestone for the U.S. equities market and other markets around the globe, as it will combine two organizations that have been innovative in creating a more competitive marketplace to benefit all investors," said Ratterman in a statement.
The combined company will use the proprietary BATS technology and will be based in the Kansas City area, with additional offices in Jersey City, New York and London. All four U.S. equity exchanges operated by BATS and Direct Edge will remain in operation under the agreement — the BATS BZX and BYX exchanges, and the Direct Edge EDGX and EDGA exchanges.
In addition, BATS operates a U.S. equity options market and BATS Chi-X Europe, while Direct Edge is continuing to work towards opening an equity market in Brazil.
Rutgers economics professor Bruce Mizrach noted that trading volume has been declining in the equity markets.
"BATS and Direct Edge are number 3 and number 4 in volume, and their combination may prove to be a stronger competitor to NYSE and Nasdaq," he said.