Carbonn's Copy: The Consoli-Dating Game


Shortly after Inside Market Data last went to press, Chi-X Europe announced that it had received a letter of intent from an unnamed party soliciting a possible acquisition, and press reports since then have suggested that the suitor is BATS Global Markets.

I can't confirm whether those reports are true, but any indication that Chi-X shareholders are entertaining a sale should draw the attention of other interested suitors. So as this is my last column for a while - IMD returns to its rightful stewardship next week when Max returns from holiday - I thought I'd take the opportunity to speculate on who might line up a bid, and why.

A tie-up between Chi-X and BATS Europe would certainly create a powerhouse - with a commanding share of pan-European equity trading - while consolidating onto a single technology platform could also yield cost synergies, both for the operators and their mutual clients. But BATS already has its plate full managing its organic growth - with the recent launch of its new US options market, the impending launch of its second US equities exchange and continuing growth in its European market share - so an acquisition is by no means necessary at this stage.

As a lean and low-cost operator, BATS is also unlikely to have the immediate funds to finance a cash offer, though that does not rule out an equity deal, and Chi-X Europe shareholders - many of whom also hold a stake in BATS - could still have the opportunity to cash out their stakes in a newly combined entity, should the exchange group decide to go public via an IPO-a move that has long been rumoured.

Given the pros and cons of combining "Chix with Bats" [sounds frightening - Ed], we might also consider the timing of a deal. So why now? The EC's upcoming review of the Markets in Financial Instruments Directive (MiFID) holds a clue, as it could pose both threats and opportunities to the multilateral trading facility business model.

Possible threats come in the form of increased regulatory burdens, and corresponding costs, as incumbent exchanges have argued that the competitive landscape created by MiFID is by no means fair, given that they pay much higher regulatory levies than their MTF rivals. Should regulators increase those levies for MTFs, a tie-up would be one way to share that burden.

In terms of opportunities, recent consultations from the Committee of European Securities Regulators have strongly supported the concept of a consolidated tape for Europe - either industry-led or mandated - which could generate more data revenues for MTFs such as Chi-X, given that its already sizeable market share in trading should entitle it to a generous pro rata share of any money generated from such an initiative.

But as any potential buyer would stand to benefit from this revenue stream, and share in any increased regulatory burden, there might be other suitors that are eyeing Chi-X's tasty assets - notably incumbent exchanges.

Nasdaq OMX recently shuttered its own MTF, but I suspect its pan-European ambitions have not dwindled, and the group has not shied away from acquisitions in the past, particularly ones that would offer a strong foothold in London. Deutsche Börse may also be keen to boost its efforts at pan-European trading and establish a strong London presence, NYSE Euronext could see Chi-X as a prize asset to lure even more high-frequency traders to its new state-of-the-art Basildon datacenter, and while the LSE Group can't be ruled out, it may have less to gain.

But as interested parties size up the prize at stake, who knows, perhaps Chi-X will shun all advances and decide to go it alone.

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