The proposed merger of upstart U.S. equity exchanges makes strategic sense amid slumping trading volumes, says Moody’s Investors Service in a new report.
In the wake of the proposed merger between U.S. equity trading venues, BATS Global Markets and Direct Edge Holdings LLC, the rating agency has put a positive outlook on BATS, citing “the sound strategic rationale for the merger and the potential for cost synergies from combining the two operations.”
Moody’s says that the proposed merger “is a logical response to depressed industry trading volumes that may continue for some time.”
“Increased scale should also allow BATS to continue to invest to meet new technological and regulatory demands that are likely to face all exchanges in the future,” it adds.
Although, it cautions that any new regulations that would curb high frequency trading, restrict maker/taker pricing, or ban certain order types, could place downward pressure on the rating.
Moody’s says that an upgrade to BATS’ ratings will depend on “the success of merger execution, continued high reliability of operating performance and the ability of the new company to continue to diversify earnings.”
It notes that BATS has generated strong cash flow in the past year, after successfully integrating its Chi-X acquisition, and that this is also a factor in assigning a positive outlook. Indeed, it says that how exchanges deploy free cash flow remains an important rating driver.
The rating agency also cautions that the transaction does present execution risks, and that the projected cost savings may be difficult to achieve. It also notes that the firms are planning to keep all of their existing markets running, “to maintain customer segmentation and trade capture rates and minimize revenue attrition.”