CBOE acquires National Stock Exchange

The CBOE Stock Exchange has acquired the National Stock Exchange, consolidating two of the US’s remaining independent stock markets.

Though the number of exchanges in the US has been on a steady decline over the last 20 years, as regional exchanges shuttered or converted to electronic markets, only to be bought by larger competitors like NYSE Euronext or Nasdaq OMX, the advent of the national market system has given a role to small exchanges.

As volumes have fallen over the past three years, stock exchanges now often compete on the basis of pricing schemes to attract new types of trades, such as high-frequency strategies that make money by taking advantage of rebates offered by exchanges to place or execute against orders on their market.

Exchanges globally have been in a rush to merge to gain scale and competitive advantage, though many of those mergers – such as the Nasdaq’s bid for NYSE – have been blocked by regulators and antitrust authorities.

The CBSX, which is co-owned by the Chicago Board Options Exchange and a group of nine-market making firms, including Cowen and Interactive Brokers, was founded five years ago to cater to floor options traders who wanted to also trade stocks. But the exchange has since moved from Chicago to the Equinix servers in New Jersey.

It now caters to brokers and trading firms that take advantage of high rebate fees or use its relatively shallow order book to quickly rise to the top of the trading queue, said David Harris, chief executive. CBSX earlier this week announced a new pricing scheme, raising the rebate it paid to traders who executed against orders.

The NSX was formerly the regional Cincinnati Stock Exchange, which was founded in 1885. It became an all-electronic exchange in 1980 and moved to Chicago and changed its name in 2003.

Its primary business is printing and displaying trades executed by broker-owned platforms, such as Citigroup’s Lavaflow and Credit Suisse’s Light Pool, that are not regulated exchanges, so that they can meet requirements to trade at the national best bid and offer.

Mr Harris said the merger gives the CBSX its own exchange license – previously it traded under the CBOE’s license – and two markets that use different pricing, a strategy that has aided the development of new independent exchanges, such as Direct Edge and BATS Global Markets. Nasdaq also cited a similar strategy when it presented its proposed merger with NYSE.

The move allows CBSX to operate independently of CBOE, adding to its value, Mr Harris said. It also gives the CBSX access to NSX’s broker-dealer, which will allow it to route trades to any market.

“We are in a real transition. It’s like we’re starting over,” he said. “We want to be focused on serving customers rather than generating volume. We would be responsive to anybody who has a market structure problem to solve.”

Together, the two markets will execute less than 1 per cent of total US market volume, though Mr Harris said the CBSX was profitable last year and can continue to do so with little volume.

The terms of the transaction between the two private companies were not disclosed.

Though the CBSX operates in the same data centre as CBOE’s electronic options exchange, C2, the two exchanges do not operate together. A spokesperson for CBOE said the merger would not affect its own business.

The only remaining independent regional exchange is now the Chicago Stock Exchange. Over the past two years Nasdaq OMX acquired the other remaining regionals, the Philadelphia Stock Exchange and the Boston Stock Exchange.

Other regional exchanges have long since become part of global groups, such as the Pacific Exchange, a roll-up of the San Francisco and Los Angeles exchanges. It merged with electronic platform Archipelago in 2005, then with the New York Stock Exchange.