Cboe Global Markets Inc. is buying one of the largest U.S. dark pool operators in a deal that will give it an inroad into the expanding world of off-exchange trading.
The Chicago-based stock exchange runner has agreed to acquire BIDS Trading LP for an undisclosed "not material" amount, according to an Oct. 16 announcement. Cboe plans to fund the deal with debt. It is expected to close in early 2021, pending regulatory review and other closing conditions.
Already the third-largest U.S. stock exchange operator, Cboe will now have a chance to expand its equities business into the booming off-exchange market that has notched several new records in 2020. It could also help Cboe potentially expand into other geographies or asset classes.
"It's really [about] stepping into that off-exchange segment," said David Howson, president of Cboe Europe, in an interview. "Through the acquisition, we're able to diversify our U.S. equities offering beyond the traditional exchange products and services."
Founded in 2006, BIDS Trading operates one of the most active dark pools in the U.S. Dark pools, commonly run by major Wall Street banks and brokerages such as UBS Group AG and Credit Suisse Group AG, are effectively private stock markets that offer investors and traders the chance to deal stock with more discretion than on any of the 16 U.S. national securities exchanges, including those run by Cboe. The BIDS ATS was the No. 1 dark pool for block trades of more than 10,000 shares in August, having handled 17,789 trades, according to data from the Financial Industry Regulatory Authority. The average size of each trade was 26,470 shares.
The deal, if approved, would be the first instance of a U.S. securities exchange owning an ATS, a Cboe spokesperson said. Cboe plans to run the BIDS ATS as an "independently managed and operated trading venue" that is separated from its securities exchanges, if the deal is approved, according to the deal announcement. BIDS CEO Tim Mahoney is expected to stay on in his role and will report to an independent committee of the Cboe board.
BIDS is expected to be immediately accretive to Cboe's 2021 earnings, adding about 5 to 6 cents of adjusted EPS, Cboe said in the announcement. In the 12 months leading up to June 30, BIDS posted about $42 million of net revenue.
It is not just U.S. equities where Cboe could see growth from the BIDS deal.
The BIDS deal, which comes months after Cboe bought Canadian equity dark pool MATCHNow from Virtu Financial Inc., comes after several years of the dark pool operator and exchange working together in Europe. BIDS helped establish Cboe's Large-In-Scale block-trading venue, which has secured market share of more than 20% of all block trades in Europe in about four years.
With relationships across Wall Street's buy and sell sides, BIDS could serve as the "foundation" for Cboe "to potentially build more off-exchange products and services in non-U.S. equities or options products and in other geographies beyond the U.S.," the exchange said in its announcement of the deal.
Goldman Sachs & Co. LLC and Centerview Partners LLC advised Cboe on the deal, while Broadhaven Securities LLC advised BIDS. Davis Polk & Wardwell LLP and WilmerHale were Cboe's legal advisers on the transaction. BIDS' legal adviser was Morgan Lewis & Bockius LLP.