Direct Edge Gets Equities Exchange in ISE Deal
August 25, 2008
Direct Edge, seeking to further accelerate its rapid growth, announced Friday that it has signed a definitive agreement with the International Securities Exchange that will make the ISE Stock Exchange a wholly owned subsidiary of the innovative electronic communications network (ECN).
Under the deal, ISE will become the largest single shareholder in Direct Edge, paying $123 million for a 31.54 percent stake. Following the completion of the transaction, expected in the fourth quarter, the ECN's existing investors--Knight Capital Group, Citadel Investment Group's derivatives arm and Goldman Sachs--will each hold 19.9 percent shares. The ISE Stock Exchange's backers, including Bear Stearns, Deutsche Bank, E-Trade Financial, Interactive Brokers Group, JP Morgan Chase & Co., Merrill Lynch & Co., Nomura Holdings, Sun Trading and VDM Capital, will own the remaining 8.76 percent. The Citadel unit and Knight are also investors in the ISE Stock Exchange.
Pending regulatory approval, it will have control of the ISE Stock Exchange, which it will operate side by side with EDGA and EDGX, and "will by virtue of that have many of the benefits of exchange status through that relationship, both economic and our own direct control about how our orders are represented in the national market system," said William O'Brien, CEO of Direct Edge, on a conference call. After Direct Edge obtains exchange licenses for its platforms, the ISE Stock Exchange will be decommissioned, he added, though its technology will live on.
Direct Edge, which is the fourth-largest U.S. equities venue, executes more than 1 billion shares per day. "We've gone from matched market share of a little over 3 percent to approaching--and in the last couple of days surpassing--6 percent, just over the last six months," said O'Brien. Its EDGX platform, making up two-thirds of its volume, offers a traditional exchange model where users are given rebates for providing liquidity and charged to take it, while EDGA provides no fees or rebates and only charges for routing orders.
The deal "reconfirms that we are a player that is staying in the game," O'Brien told Securities Industry News. "There are four major market centers for U.S. cash equities. Soon all four will be on equal footing as exchanges. I expect Direct Edge will be able to leverage the ISE Stock Exchange's technology and expertise and continue to innovate, which will position us very nicely for the future."
ISE's equities offshoot, which opened in September 2006 with the launch of its MidPoint Match, a dark liquidity pool that is fully integrated with its displayed market, is known for the aggressive credits it gives liquidity providers. In July it executed a record 94.1 million shares, up from 69 million shares in June, according to an ISE spokesperson. Direct Edge expects to integrate the MidPoint Match technology into its platforms.
"Through this transaction, we will be aligning ourselves with an innovative new leader whose compelling offering stands out in the highly competitive cash equity space," said Gary Katz, president and CEO of ISE, in a statement. "We have successfully grown the ISE Stock Exchange to the point where it is today, and are confident that this partnership with Direct Edge is the logical next step that will enable us to continue our strong growth in the U.S. equities market." New York-based ISE, typically the second-largest U.S. options venue in terms of volume, is a subsidiary of the Eurex derivatives exchange, which is co-owned by Deutsche Borse and SWX Swiss Exchange.
