Emboldened CBOE buys exchange operator Bats to rival NASDAQ
The Chicago Board Options Exchange (CBOE) has completed its purchase of Kansas-based rival Bats Global Markets for $3.4bn. The addition will give CBOE an estimated market value of $10bn, putting it in a similar league to the NASDAQ stock exchange. CBOE is the largest options platform in the US, and the addition of Bats’ technology will expand the platform’s trading operations. Chris Isaacson, Bats' chief information officer, will move to CBOE in the same position.

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On March 1, 2017, the Chicago Board Options Exchange completed its $3.4 billion acquisition of rival Kansas-based Bats Global Markets. (Chicago Tribune)

There's a new financial behemoth in town.

Wednesday, the Chicago Board Options Exchange completed its $3.4 billion acquisition of rival Kansas-based Bats Global Markets. Combined, the new CBOE emerges with an estimated $10 billion market capitalization, which is in the neighborhood of the competing and better-known New York-based NASDAQ stock exchange.

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That's pretty good for an organization often touted as a likely seller rather than a buyer. Usually, the suitor was rumored to be the Chicago-based CME Group, which is sort of a second cousin to the CBOE.

That big buyout narrative, however, changed last September once the deal for Bats was announced and plans for a newly fortified CBOE began percolating.

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"I don't know if the (CME) rumor will ever be fully squashed," says Edward Tilly, CBOE's chief executive officer. "But we don't wait around for a knock on the door."

Edward Tilly, left, chairman and CEO of the Chicago Board of Options Exchange, and Chris Concannon, former CEO of Bats Global Markets and new CBOE president, ring the bell together March 1, 2017, in Chicago to mark the opening of the first trading day as the new company. (Nancy Stone / Chicago Tribune)

Indeed, CBOE Holdings, which oversees the exchange, saw a growth opportunity with Bats and went for it.

Bats was started in June 2005 and now is the second-largest stock exchange operator in the country with a significant European presence, according to its website.

In high-finance circles, Bats is known for being fast-paced and technologically adroit with a relatively small staff of about 280 employees and offices in New York, London, San Francisco and Singapore. The firm offers a variety of successful electronic stock trading products and platforms used by institutional investors and other financiers.

The CBOE — spun off in 1973 from the Chicago Board of Trade, which in 2007 merged with CME — has made its bones as an operator of the country's largest options platform.

Very simply — and I do mean very simply — an option is usually a stock or commodity contract that gives a buyer the right to buy or sell at a set price and date. Basically, CBOE traders make a multibillion-dollar market for those buying and selling options, which serves to generate transaction fees for the exchange.

Historically, Chicago exchanges are known for the dramatic flair of the open outcry system, which means images of traders screaming and waving their arms about while trading. That era has given way at CME to the more sedate-looking, but equally intense, computer-based trading. The CBOE uses a hybrid model, a combination of electronic trading and open outcry.

Over time, the CBOE has introduced some marquee indexes designed to help investors gauge market sentiment.

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In that arena, it is probably best known for the CBOE Volatility Index, the so-called fear index, which helps signal what future shocks may be in store for the market. It's also known for the benchmark S&P 500 index option.

Going forward, the enormous technology trick will be to seamlessly fuse CBOE's trading operations into Bats' computer systems.

Taking the lead on that crucial operation is Chris Isaacson, formerly Bats' chief information officer, who will have the same role at the newly formed company.

Meshing key operating systems, or grafting them onto new technology, can be an operational nightmare for some companies.

Airlines and banks, for instance, have suffered merger-related technology shutdowns and service disruptions that have angered and alienated customers.

The stakes are especially high for CBOE, which handles billions of dollars in transactions and will be integrating components of its multiple systems into Bats' system.

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That may prompt some traders and clients to hold their breath, but Tilly isn't worried.

"The good news is that Bats has done this before, domestically and internationally," said Tilly. "I have all the confidence in the world in this team."

So confident, in fact, that CBOE is dropping an expensive upgrade of its existing technology and moving over to the Bats system, saving the exchange an estimated $50 million or more over an estimated three years.

That's called "synergy," which can also be code for staff cuts.

Expect some job reductions to occur, probably within areas such as tech that overlap or are redundant with Bats operations. Tilly confirmed there will be cutbacks, but didn't give any details.

CBOE also will launch new trading products and build upon Bats' European network to expand its reach and take on rivals' overseas exchanges for more institutional clients and fee-based transactions.

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Locally, the CBOE intends to stay put in Chicago, with the CEO directing his new, bulked-up company from the exchange's LaSalle Street headquarters in the city's financial district.

Says Tilly: "This is a trading town."

roreed@chicagotribune.com

Twitter @reedtribbiz