Cboe Global Markets, Inc. a market operator and global trading solutions provider, is buying Chi-X Asia Pacific Holdings(Chi-X Asia Pacific), an alternative market operator from J.C. Flowers & Co.
Australia’s economy is the world’s 9th largest economy accordong to Cboe, representing approximately $2.2 trillion in market capitalization and averaging 4.6 billion shares traded a day in its equities market. Japan ranks as the 4th largest global economy, representing $6.2 trillion in market capitalization with over $5.1 trillion total value traded annually in its equities market.
Given Cboe’s strength in derivatives, the move is potentially challenging for the ASX Trade24, the old Sydney Futures Exchange.
The likely immediate casualties are the smaller exchanges, National Stock Exchange, and Sydney Stock Exchange. Had either been able to secure a tie with Chi-X Asia Pacific this would have given them access to trading platforms like Commsec, dramatically increasing liquidity.
We asked asset manager Michael Fagan, Chairman at Volatility Funds Management, to explain the context of the deal and the implications for local markets.
“I think the big picture from 40,000 feet is that the market on the derivatives side of things needs to be really well-capitalized and risk-managed. ”
He said that in the US, the Cbeo has largely subsumed the role that the over-the-counter markets used to play by acting as the credit facilitator between parties.
“What we found in 2008, was that once counterparties started to distrust each other, the market started to freeze up.”
He also called out the role of Deutsche Bank, about whom he has written extensively, telling Which-50, “I guess, primarily the reason this is going ahead is that Deutsche Bank just doesn’t have the balance sheet anymore, and they need to clean all this stuff up, and therefore they can’t act that credit facilitator.”
“I’d expect other assets that Deutsche has been backstopping to also get taken over.”
As to what the deal means for the Australian market, Fagan said that at least initially, it is hard to say. “You would have to really know what the situation is in the derivatives markets here more than anything else because that’s what the Cboe wants to innovate on.”
He also said the deal represents a legitimate challenge to ASX Trade24. “If you believe the Cboe is the main innovator in the listed derivatives space, then that should put a real challenge out to the ASX.”
The deal gives Cboe a single point of entry into two key capital markets – Australia and Japan –helping it to expand its global equities business into Asia Pacific
The transaction is expected to close in the second or third quarter of 2021, subject to regulatory review and other customary closing conditions.
According to Ed Tilly, Chairman, President and CEO at Cboe Global Markets,: “With the planned acquisition of Chi-X Asia Pacific, we continue to execute on our growth strategy by broadening our geographic and asset class presence, while enabling the further extension of our product offerings to our global network of customers. This is an exciting investment in attractive, growing markets that will complement our North American and European operations and provide a foothold in the key Asia Pacific region, positioning us to become a truly global marketplace for our customers.”
In just a few years the Chi-X Asia Pacific team has built their business into one of the largest market operators in Asia Pacific, said Tilly. “We aim to bring greater choice to investors in Asia Pacific.”
Chi-X Asia Pacific has core operations in Australia and Japan. In Australia it is the country’s second-largest securities exchange with 18.4 percent total market share. It offers trading in all Australian-listed securities, as well as the exclusive trading of CXA quoted warrants and ETFs.
Chi-X Japan meanwhile (CXJ), offers a proprietary trading system for Japanese equities and is the third-largest equities venue in the country.
David Howson, currently President of Cboe’s European operations will lead the company’s business expansion into the region and has been promoted to President, Europe, and Asia Pacific.
Howson will work closely with the global Cboe team and with the Chi-X Asia Pacific local management teams led by Vic Jokovic, Chief Executive Officer at Chi-X Australia, and Toru Irokawa, Representative Director and President at Chi-X Japan, who will continue to lead their businesses.
Cboe said that it plans to leverage Chi-X Asia Pacific’s presence in the Asia Pacific and bring to the region BIDS Trading’s industry-leading block trading capabilities.
“With BIDS’ current network covering major North American and European equities markets, the addition of Asia Pacific equities is expected to create a global block trading platform to serve a broader base of customers.”
Cboe also says it expects to enhance investor access to other products and services. In particular, Chi-X Asia Pacific is expected to provide an expanded distribution network enabling Cboe to further offer its unique proprietary products to clients in Australia and Japan.
This deal also creates an opportunity for Cboe to become the global leader in equities market data, offering comprehensive data from most major markets around the world including the U.S., Canada, Australia, Japan, and 15 European countries.
According to Jokovic: “Over the past decade, Chi-X Australia has built an enviable reputation as an innovative market operator with superior market expertise, customer service, and a pioneering spirit that strongly aligns with Cboe’s legacy of product and market innovation. “