CBOE Holdings Inc.’s $3.2 billion deal to acquire Bats Global Markets Inc. is some of the strongest evidence yet of exchange-traded funds’ growing importance on Wall Street.
The purchase, announced Monday by the owner of the Chicago Board Options Exchange, gives CBOE a major player in U.S. and European stock trading. Though regulatory and technological changes have largely diminished profits for stock exchanges, ETFs are breathing new life into the business. Bats handles about a quarter of the funds’ trading volume in the U.S., meaning CBOE is buying a significant beachhead.
“This combination gives more power not only to listing of ETFs, but also to the trading of ETFs,” Bats CEO Chris Concannon said Monday during a call with analysts and reporters following the CBOE deal announcement. “The scale we will achieve as a combined company allows us to be that much more aggressive.”
For many investors, ETFs are replacing huge swaths of traditional assets, including individual stocks, bonds and mutual funds. U.S. assets have swelled to $2.4 trillion, more than double five years ago, according to data compiled by Bloomberg.
Exchanges want a piece of the action. Atlanta-based Intercontinental Exchange Inc. dominates through its ownership of NYSE Arca, which lists ETFs worth $2.23 trillion, while Nasdaq Inc. is offering incentives to boost trading of the products. Lenexa, Kansas-based Bats recently lured ETF executive Laura Morrison from NYSE and bought ETF.com, a data and news provider for the industry as Concannon aims to unseat ICE as the top ETF venue.
CME Group Inc. is glaringly absent. Valued at $36 billion, the Chicago-based company is the biggest exchange operator in the world, but it doesn’t offer ETFs -- though it’s exposed to the business through its stake in index compiler S&P Dow Jones Indices.
ETFs trade like stocks and contain baskets of securities or derivatives. CBOE currently only trades options linked to the funds, while Bats has staked its reputation on ETF trading, which relies on nimble, fast technology. As part of the deal, CBOE is scrapping its trading software for Bats’s technology, regarded as some of the best in the industry.
ICE Challenger
Combining with Bats to provide marketplaces for both ETFs and ETF options could give CBOE a boost as it looks to challenge Jeff Sprecher’s behemoth Intercontinental Exchange, which offers both options and equities trading, according to Spencer Mindlin,
an analyst at Aite Group LLC.
“If it’s under one roof, they’d be in a pretty good position to turn around some options-plus-ETF products that market participants could take advantage of,” Mindlin said. “That potentially gives them a leg up, the ability to offer products that combine listed options on ETFs with the underlying ETF product.”