To whip up more ETF trading on its venues, this month Bats started offering cash incentives to market makers that offer to buy and sell the products. Concannon has said he wants to turn Bats into the top listing venue for ETFs in the next three to five years, but ICE is a formidable incumbent. Nasdaq has also tried to expand its footprint in ETF trading and listings, introducing a program to share trading revenue with market makers this year.

Stealing Volume

“We’ve seen ETFs take volume away from everything, including single securities and derivatives,” said Eric Balchunas, an ETF analyst at Bloomberg Intelligence. “The institutional world tends to view ETFs as a competitor to a derivative.”

There is $3.4 trillion invested globally through strategies that mimic indexes, according to Richard Redding, chief executive officer of the Index Industry Association, whose organization represents companies including S&P Dow Jones Indices and MSCI Inc.
That compares with about $2.9 trillion in hedge funds.

“Indexes are driving a lot of the investment decisions,” Redding said. “The index/ETF business is larger than the hedge fund business.” 

Redding said that for CBOE, the rationale for buying Bats may have boiled down to upgrading the company’s technology, entering the ETF business and complementing CBOE’s existing index division, which includes the VIX, a key measure of market volatility. Redding used to work for CME Group, operator of the world’s biggest derivatives exchange.

CME’s Move

If the deal is approved by regulators, CME Group would be left as the last major U.S. exchange operator without the ability to trade ETFs, as it currently doesn’t offer securities-based products. That may be starting to change. Part of the company’s strategy is to expand its reach to retail customers, according to a person familiar with the matter. CME Group’s revenue from retail trades grew 22 percent to $135 million compared with the same period in 2015, said Laurie Bischel, a spokeswoman.

As the exchange seeks to draw more retail users to its markets it could expand into other products such as ETFs, said the person, who asked not to be named discussing strategy. That would require CME Group to acquire or build a securities market under the supervision of the U.S. Securities and Exchange Commission. Ownership of CBOE or Bats would trigger such regulation. Bischel declined to comment on whether CME would buy a securities exchange.

The CBOE and Bats deal is expected to close in the first half of 2017, according to the companies. The combined entity would be based in Chicago, with CBOE CEO Edward Tilly remaining in his current role. Concannon will become president and chief operating officer.