Merrill Lynch and Citadel Derivatives have each acquired ten per cent stakes in loss-making options mart, The Philadelphia Stock Exchange.
The investment in PHLX comes at a time of ferment in US financial markets, as exchanges consolidate in a bid to attract more liquidity and order flow. Demutualised PHLX, which has been losing money while trade in options has soared, said in April it was looking for equity partners.
The deal with Merrill and Citadel is expected to be the forerunner to further equity investments by other securities industry players. Both firms have also bought warrants that would allow them to take up additional stakes in the exchange. Financial details have not been disclosed, but it is understood that Merrill and Citadel each paid approximately $7.5 million for their initial investments.
Merrill MD and head of global equity trading Rohit D’Souza, says: "Our clients want quality executions delivered quickly and economically from a range of trading venues, and PHLX's low-cost, electronic platform will help us to meet those demands."
Merrill Lynch earlier this year agreed to acquire Pax Clearing, which processes options, stock and futures trades.
The Philadelphia exchange, which was founded in 1790, has handled 10 percent of equity options trading so far this year, well below the 33% market share commanded by the all-electronic International Securities Exchange.
The deal with Citadel and Merrill is likely to direct more order flow towards PHLX. Citadel is the ISE's largest market maker, while Pax's customers include broker-dealers that operate on the floor at the traditional US options exchanges and off-floor professional traders and trading firms. Stock trading on the exchange may also get a boost - should Merrill decide to shift some of its liquidity away from the New York Stock Exchange in protest at Goldman Sach's overweening role in the Nyse/Archipelago merger.