Two more US exchanges as Direct Edge makes its move

Wed Jul 21, 2010 1:00am EDT

* EDGX and EDGA platforms convert to formal exchanges

* Gives private company equal footing with NYSE, Nasdaq

By Jonathan Spicer

NEW YORK, July 21 (Reuters) - A private company called Direct Edge converts its two alternative trading platforms into formal U.S. exchanges on Wednesday, shifting a big chunk of the stock market back to the traditional forum for trading.

The long-awaited move brings new stock symbols to trading screens across the country, and should eventually run about a tenth of all volumes through a new and faster electronic platform in Secaucus, New Jersey.

It also puts Direct Edge on equal footing with incumbents NYSE Euronext NYX.N, Nasdaq OMX Group Inc (NDAQ.O) and BATS Global Markets -- rivals it has aggressively and successfully taken on in the hyper competitive market for order flow.

Chief Executive William O'Brien said Direct Edge is not about to branch into unfamiliar territory with its exchange status, which brings with it tighter regulatory oversight.

But the CEO said a new data center launched during the conversion opens a new battle front with competitors in selling trading data to increasingly hungry investors.

"That's something we view as a way to broaden our competitive footprint," O'Brien said in an interview. "As great as this company has progressed so far, I still feel like it is still getting started."

Direct Edge, now owned by Knight Capital Group Inc (KCG.N), Citadel Derivatives Group, Goldman Sachs Group Inc (GS.N) and a handful of others, began in 1998 as a so-called electronic communication network (ECN) called Attain.

Knight bought and renamed it in 2005 as the first wave of alternative venues died. Along with BATS, Direct Edge came back in force over the last few years, again driving fees lower and forcing the Big Board and Nasdaq to upgrade systems.

Direct Edge filed its exchange application in May last year. After some delay, its two platforms EDGX and EDGA now convert to exchanges after months of claiming about 10 percent overall market share, although that slipped to about 7 percent this month.

O'Brien said that setback, as well as some technical glitches as brokers adjusted their systems in the last few weeks, are to be expected as part of the undertaking.

"Some customers, trying to protect their own customers, are waiting until the migration is completed until engaging and that's a natural, understandable occurrence," O'Brien said.

Patrick O'Shaughnessy, exchanges analyst at Raymond James and Associates in Chicago, wrote in a note "the disruption to business-as-usual has likely steered away some client order flow in the near term... Direct Edge's July loss appears to be the gain of Nasdaq OMX, BATS, and non-displayed" venues.

Although Direct Edge said there is room for growth in its core market, it will likely be tough.

U.S. market share has settled into a fairly stable pattern in the last 18 months, with NYSE Euronext's venues at just more than 25 percent and Nasdaq OMX's venues at just less than 25 percent. BATS, a former ECN that became an exchange late in 2008, has about 10 percent.

"This is another step that they needed to take to ensure that they're able to compete effectively," Sang Lee, managing partner and market structure expert at Boston consultancy Aite Group, said of Direct Edge.

"But when you're in such a competitive market, it would be nice if they had some easier opportunities elsewhere."

Unlike Kansas City-based BATS, Direct Edge is not talking publicly about opportunities in Europe or in options. O'Brien instead talks about "rational ways of thinking big," including new services and products tied to U.S. cash equities.

Practically, being an exchange saddles Direct Edge with a lengthier and more transparent process for making changes, such as to prices.

The conversion will also likely bring the company closer to the U.S. Securities and Exchange Commission, which is leaning on exchanges as it investigates and adjusts a marketplace bruised by the May "flash crash," which exposed deep flaws.

JPMorgan Chase & Co (JPM.N) and the International Securities Exchange, a unit of Deutsche Boerse's (DB1Gn.DE) Eurex unit, are the other two Direct Edge stakeholders. (Reporting by Jonathan Spicer; Editing by Sofina Mirza-Reid)

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