It’s interesting that two private equity firms, Spectrum Equity and TA Associates, have acquired minority stakes in exchange operator BATS Global Markets, shifting attention away from last week’s outage and potentially bringing a fresh perspective.
The entry of new investors tells me that both private equity firms see growth potential in global trading and the exchange business and that they don’t see the last week’s network glitch as a major problem.
Last week, BATS’ had an outage on it main market that lasted about an hour due to a network issue. Trading was quickly shifted to other rival exchanges.
The two firms are obtaining all of their shares from the estate of Lehman Brothers Holdings, an entity that holds billions of dollars assets left by the bankrupt Wall Street firm. Lehman Brothers bought a stake in 2006 and held 12.6 percent of the voting rights stake in BATS, according to The Wall Street Journal, which reviewed BATS’ filings.
The two private equity growth firms are joining an existing group of investors including BATS’ founder Tradebot, a high frequency trading firm. Others include: Citigroup, Bank of America, Credit Suisse, Deutsche Bank, Wedbush, KCG (Knight Capital Group) and Morgan Stanley.
Could it be that BATS is seeking outside financing from private equity firms because it was counting on its own initial public offering (IPO) to bring in cash? In March of 2012, BATS had a software glitch forcing it to halt its own initial public offering, which would have raised capital. "BATS was NOT seeking to raise money in the IPO," according to Randy Williams, SVP and spokesman for BATS. "All of the money in the transaction was going to selling shareholders. We weren’t raising any capital. Also, we aren’t receiving any funds from the private equity firms, either. Those funds went solely to the Lehman estate – no proceeds to BATS."
The actual reason seems to be that Lehman’s estate was looking to reduce its stake down to 7.7 percent through the BATS IPO. With the IPO not happening, it looks like a match was made between the seller and the private equity firms.
But private equity firms usually don’t invest unless there is an exit strategy such as a potential IPO or a sale to another company.
A spokesman for BATS told the WSJ that BATS has no plans for an IPO in the short-or-long term.
“BATS has talented management team and proprietary high performance technology have enabled the company to maintain its market share and position the company for future growth,” stated Ken Schiciano, managing director at TA Associates, a global growth private equity firm in today’s announcement.
BATS is ranked as the third largest US equities exchange operator in the world, and the fourth largest in the US in the last month, with about 9.6 percent of US trading volume in July. It has expanded into pan-European cash equities with Chi-X Europe where it recently obtained registered investment exchange status. It has 24.3 percent market share in stocks in the EuroSTOXX 50. With this REI status, pension funds that couldn’t invest on a multilateral trading facility, can now consider BATS, a BATS spokesperson recently told me. It also operates the BATS Options market in the U.S., where its market share hit a record 4.5 percent in July. It also offers a primary listings business for ETFs in the US.
One recent change is that BATS is also beginning to charge for its market data. Starting on July 1st BATS rolled out a competitive pricing model for proprietary market data, a spokesperson also told me.
But will these new private equity owners urge BATS to expand into other areas?
Many exchanges like Nasdaq OMX, NYSE Euronext, London Stock Exchange and Deutsche Borse, have expanded into providing information services and technology-related infrastructure as well as risk management. Many license their market technology to overseas markets. .Thus far, BATS has chosen to focus on its core competency, operating trading engines and does not license its technology to others. For example, Spectrum Equity has an exclusive focus on the information economy, while TA Associates has a history of investing in financial tech companies such as Lava Trading and Smartstream. It will be interesting to see how BATS evolves now that it has new owners from private equity.