NEW YORK (Reuters) – Direct Edge, an electronic stock trading platform, may go public as soon as 12 to 18 months from now, and expects to boost revenue and cut costs once U.S. regulators award it exchange status, Chief Executive William O’Brien said on Monday.
Speaking at the Reuters Exchanges and Trading Summit, O’Brien said becoming a stock exchange should allow Direct Edge to add $40 million of annual revenue from market data, and save $8 million to $10 million a year in costs.
The Jersey City, New Jersey-based company applied last week with the U.S. Securities and Exchange Commission to become an exchange operator, joining NYSE Euronext (NYX.N: Quote, Profile, Research, Stock Buzz) (NYX.PA: Quote, Profile, Research, Stock Buzz), Nasdaq OMX Group Inc (NDAQ.O: Quote, Profile, Research, Stock Buzz) and BATS Trading.
“I purposefully did not come to Direct Edge to flip it,” said O’Brien, who joined the company from Nasdaq in 2007. “With the people and the products we offer, we could be here for the long term.” An initial public offering, he said, “would be a natural part of that strategy.”
Direct Edge is now an electronic communication network, or ECN, that matches equity transactions on two platforms, known as EDGX and EDGA.
In contrast, BATS Chief Executive Joe Ratterman told Reuters separately that his exchange had no plans for an IPO.
Direct Edge surpassed the U.S. equity market share of its slightly older Kansas City-based rival BATS this year. It matched 12.5 percent of trades in April, compared to 10 percent at BATS, which became an exchange in the fall of 2008.
CEOs of the two companies told the Summit they now have long-term business models, unlike the previous wave of electronic communications networks, or ECNs, such as Brut and Archipelago, that were bought up by Nasdaq Stock Market and the New York Stock Exchange, respectively, earlier this decade.
ECNs are electronic systems that bring together buyers and sellers for electronic stock trading.
Direct Edge’s backers include Citadel Derivatives Group, Goldman Sachs Group Inc (GS.N: Quote, Profile, Research, Stock Buzz), Knight Capital Group Inc (NITE.O: Quote, Profile, Research, Stock Buzz) and the International Securities Exchange, the second-biggest U.S. options market.
Direct Edge and BATS’ expansion in equity trading over the last couple of years sparked a price war that has reduced the cost of trading U.S. stocks, and cut into NYSE and Nasdaq market share.
O’Brien said winning exchange status would give Direct Edge greater capacity to branch into other products, but for now it is focusing on its primary business.
O’Brien, who used to head up new listings at Nasdaq, said Direct Edge could eventually compete for IPO listings with NYSE and Nasdaq, though he conceded it would difficult.
“The listings business is intensely competitive and requires a lot of resources,” O’Brien said.
BATS’ Ratterman said his company has no intentions of taking on Nasdaq or NYSE for listings.
By Jonathan Stempel and Phi”The primary business is very well served by NYSE and Nasdaq,” said Ratterman, adding that BATS would only contemplate taking on listings if it could offer a better service than the incumbents.
For Direct Edge, expanding into Europe where BATS has quickly gained market share, soon is not in the cards, in part because of heavy competition already there.
“We’ve got a lot on our plate in our home market,” O’Brien said.
“We’re not going to take a lemming-like approach, whereby simply copying the initiatives of our competitors because they look good on a PowerPoint slide.”
(Reporting by Jonathan Stempel and Phil Wahba, additional reporting by Jonathan Spicer; editing by Gerald E. McCormick, Gary Hill, Leslie Gevirtz, Richard Chang)