The Competition Commission (CC) has provisionally cleared the anticipated acquisition by Bats Global Markets, Inc of Chi-X Europe Limited.
Both companies operate Multilateral Trading Facilities (MTFs) which enable market participants (investment banks, brokers and dealers) to trade equities through a single platform as an alternative to trading on national exchanges such as the London Stock Exchange (LSE).
In a summary of its provisional findings published today, the CC has concluded that customers of both exchanges would have the power to prevent any attempt by the merged company to raise trading fees or worsen service quality, by taking - or threatening to take - their business elsewhere or even potentially sponsoring new entry by a competitor as has happened previously in this sector.
Chairman of the BATS/Chi-X Inquiry Group, Malcolm Nicholson said: The customers of both these exchanges are in a particularly powerful position to combat any attempt by the merged company to raise trading fees, reduce service quality or otherwise exploit any loss of competition.
Any MTF needs a critical mass of customers to be successful in order to provide the liquidity that will then in turn attract other customers. The two exchanges share a very similar customer base and so are dependent on retaining the business of a limited number of large financial institutions. Such institutions could quickly spot any rise in costs or fall in service quality and would have the ability to take their business elsewhere with relative ease.
They could also credibly threaten to sponsor a new competitor in response to any deterioration in the merged exchange's performance. Some of these customers are also shareholders of the two exchanges and can influence the management. They have every incentive as customers of the services provided to ensure a competitive marketplace. The major customers have also expressed no concerns about the deal.
Although Chi-X and BATS have up to now targeted their efforts at winning business from the LSE, these are relatively new businesses and so the merger of two such similar operations could significantly reduce competition. However, our provisional view is that their customers have sufficient power to maintain competition in the market.
Bats and Chi-X response:
Bats Global Markets and Chi-X Europe welcome today's announcement from the UK Competition Commission that it has provisionally decided to approve the acquisition of Chi-X Europe by Bats Global Markets.
The Competition Commission has reviewed the transaction and provisionally concluded that it does not expect it to result in a substantial lessening of competition.
Joe Ratterman, chairman and chief executive officer of BATS Global Markets, said: "We are pleased by the Competition Commission's provisional findings, which if reflected in the final report, will clear the way for the creation of an even stronger competitor to Europe's incumbent exchanges. We will continue to work closely with the Commission throughout the duration of the inquiry."
The Competition Commission is expected to publish its final report by 2nd Dec. 2011, the statutory deadline for completion of its inquiry. Assuming that the Competition Commission clears the acquisition in its final decision, it is anticipated that the transaction will be completed by the end of this year.
No further statements will be made at this time.