Most mergers, a plethora of academic studies show, end up failing to create shareholder value. The proposed tie-up between stock-exchange operators BATS Global and Direct Edge is likely to be an exception that proves that rule.
For one, it minimizes the risk of strategic overreach. Its logic is straightforward. Running the pair’s four all-electronic stock exchanges on one platform — BATS’ — will be a lot cheaper than running them on two. Out goes a whole set of data centers and the IT folk that support them, and the software engineers that develop new trading services.
BATS and Direct Edge will have a combined 21% share of U.S. equities trading, leapfrogging Nasdaq OMX’s 18% market share and closing in on NYSE Euronext’s 23%. BATS also has 24% of European stock trading, against the London Stock Exchange’s 20%. Scaling up will make the market data the two can sell more valuable, and provide a springboard for selling stock quotes, which neither BATS nor Direct Edge now do, to augment trading and data revenues.
The combo’s customers, big banks like JPMorgan Chase and Goldman Sachs, also benefit. They will only have to pay one set of membership and other fees. However, as they also own the exchanges that is moving the cost-savings from one pocket to another. But the reason they created all-electronic exchanges in the first place was to cut their trading costs.