Direct Edge CEO says exchange status first step

NEW YORK (Reuters) - Direct Edge ECN LLC, the fourth largest U.S. equities trading venue, is about to file to become an exchange, a step toward a possible initial public offering, its chief executive said in an interview on Tuesday.

In May, Direct Edge matched roughly 4 percent of U.S. equities trades, nearly tripling its volume in one year. That placed it behind only the New York Stock Exchange (NYX.N), Nasdaq (NDAQ.O) and BATS Trading, which itself hopes to be an exchange by mid-fall.

William O'Brien, who became chief executive last summer, told Reuters that becoming an exchange, which he hopes will happen in the first half of 2009, would allow the Jersey City, New Jersey-based firm to generate more revenue from market data and save money by clearing its own trades.

O'Brien, who joined Direct Edge from Nasdaq Stock Market, where he was a senior vice president, said an IPO down the road makes sense, but only if Direct Edge gets its exchange status, and expands into new assets and markets first. Being a bona-fide stock exchange would maximize the value of an IPO.

An ECN is an unregulated venue that permits private parties to trade blocks of stock but is not regulated by the U.S. Securities and Exchange Commission.

"I didn't come to Direct Edge to turn a small ECN (electronic crossing network) into a big ECN and then sell it to a Nasdaq," he said. "While any scenario is possible, we have a chance at being something more than an acquisition target."

On top of building Direct Edge's brand, O'Brien said, becoming an exchange would pave the way for his company to branch out into lucrative options trading within two years and collaborate with overseas exchanges.

FACING STIFF COMPETITION

Market deregulation in the United States and ever-faster technology has opened up fierce competition, allowing smaller players such as Direct Edge, and BATS Trading, which matches about 10 percent of U.S. equities trades, to grab market share from the major exchanges.

"Speed will stop being a differentiator soon," O'Brien said, explaining his company's efforts to provide services to different types of clients such as institutional clients or retail customers rather than just relying on breaking speed barriers.

He says one of Direct Edge's biggest advantages comes from its decision two years ago to connect to dark pools, off-exchange anonymous trading venues, where about 10 percent of U.S. equities trading happens.

Direct Edge, owned by firms led by Goldman Sachs Group Inc (GS.N), Citadel Investment Group and Knight Capital Group Inc (NITE.O), connects to 14 pools, while its rivals have only recently opened up to dark pools.

One impediment to growth has been persistent questions about the reliability of its technology during periods of high volatility. Since he took the helm last summer, O'Brien said, the company has invested in technology upgrades on its trade-matching engines and data feed systems.

Growth won't come from expanding overseas, at least not yet. Even though BATS Trading is slated to launch a European platform this year to take advantage of deregulating European market, O'Brien won't follow suit, saying "Europe is pretty crowded and deregulation still has to settle in."

The privately held company will not disclose financial data but claims it has been profitable since the fourth quarter of 2007.

(Reporting by Phil Wahba; editing by Jeffrey Benkoe)