CBOE Reportedly in Talks to Buy BATS, Looks to Gain ETF Foothold

A deal between the two major exchange groups would give CBOE exposure to new asset classes.

Shares of Lenexa-based Bats Global Markets (BATS: BATS) rose sharply in after-market trading on Thursday following a report that CBOE Holdings (NASDAQ: CBOE), operator of the largest U.S. options marketplace, was in talks to acquire the nation’s second largest stock exchange, Bloomberg reported, citing people familiar with the matter.

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After news of the negotiations broke, shares of Bats Global Markets jumped briefly 28.5 percent, while CBOE’s shares swung marginally on the news and were 1 percent higher at $69.65 in late morning trade. Just five months after Bats went public in a long-awaited IPO, the exchange operator had a market capitalization of about $2.6 billion, as of Thursday’s close.

Bloomberg said its sources claimed that a deal could be announced within weeks, though it is not finalized and could still fall. The sources had asked not to be identified as the matter is private, the report stated.

A deal between the two major exchange groups would give CBOE exposure to new asset classes, beyond its core business at options and related futures contracts. It will also give the Chicago-based options exchange operator a global presence through Bats’ business in Europe, where Bats is the largest equities exchange operator.

Moreover, acquiring Bats would allow CBOE to grab a slice of the fast-expanding market for exchange-traded funds which has grown into a more than $2 trillion asset class by offering investors cheaper products that trade like stocks but passively track indices or other baskets of securities. The CEO of Bats, Chris Concannon, predicts ETF assets will grow five-fold by 2026 from about $2.7 trillion today.

Bats was founded in June 2005 then became operator of a licensed U.S. stock exchange in 2008 and opened its pan-European stock market in October 2008. BATS also got into the foreign exchange (FX) market last year after acquiring Hotspot, a currency-trading venue, making its first foray into the $5.3 trillion market and diversifying its sources of income.

Founded in 1973, the CBOE is the first U.S. marketplace for exchange-traded stock options. CBOE Holdings, the parent company of CBOE, is ranked as the world’s seventh-largest derivatives exchange by trade volume. CBOE enjoys monopolies through exclusive licensing deals in two key products: S&P 500 Index options through 2032, and VIX volatility index options. The two products now generate more than 80 percent of CBOE’s transaction revenue.

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