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Here's why a BATS-Direct Edge merger may make sense

Franckreporter | E+ | Getty Images

There have been reports of merger talks between exchanges BATS Global Markets and Direct Edge Holdings. The deal may make sense for the following reasons:

First, the trading business is terrible. Low margin, low profits. Consolidation makes sense. The key players don't make much money. That was a big factor behind the Getco-Knight deal. Getco had significant ownership in BATS, Knight in Direct Edge.

Second, increased market share. BATS currently has 10 percent market share, Direct Edge 11. New York Stock Exchange has 23 percent, NASDAQ OMX 18 percent. So the combined entity would have a bigger market share than NASDAQ.

Third, break into the listing duopoly. Listings are controlled by the NYSE and NASDAQ, but a combined BATS-DE might be a genuine competitor for listings. Particularly after the NASDAQ fiasco yesterday.

Last, the combined entity may also be a more effective competitor in the options space. BATS option volume has recently been growing.


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