S-1 1 ds1.htm FORM S-1 Form S-1
Table of Contents

As filed with the Securities and Exchange Commission on May 13, 2011

Registration No. 333-                    

 

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

 

FORM S-1

REGISTRATION STATEMENT

UNDER

THE SECURITIES ACT OF 1933

 

 

BATS GLOBAL MARKETS, INC.

(Exact Name of Registrant as Specified in Its Charter)

 

 

 

DELAWARE   6200   11-3817385

(State or Other Jurisdiction of

Incorporation or Organization)

 

(Primary Standard Industrial

Classification Code Number)

 

(I.R.S. Employer

Identification Number)

   

8050 Marshall Drive, Suite 120

Lenexa, KS 66214

(913) 815-7000

   

(Address, Including Zip Code, and Telephone Number, Including Area Code, of Registrant’s Principal Executive Offices)

 

 

 

 

Eric Swanson, Esq.

Senior Vice President

and General Counsel

BATS Global Markets, Inc.

8050 Marshall Drive, Suite 120

Lenexa, KS 66214

(913) 815-7000

 
(Name, Address, Including Zip Code, and Telephone Number, Including Area Code, of Agent For Service)

 

 

Copies to:

Deanna Kirkpatrick, Esq.

Davis Polk & Wardwell LLP

450 Lexington Avenue

New York, New York 10017

(212) 450-4000

 

Greg A. Fernicola, Esq.

Phyllis G. Korff, Esq.

Skadden, Arps, Slate, Meagher & Flom LLP

Four Times Square

New York, New York 10036

(212) 735-3000

 

 

Approximate date of commencement of proposed sale to the public: As soon as practicable after the effective date of this Registration Statement.

If any of the securities being registered on this form are to be offered on a delayed or continuous basis pursuant to Rule 415 under the Securities Act of 1933, check the following box.    ¨

If this form is filed to register additional securities for an offering pursuant to Rule 462(b) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering.    ¨

If this form is a post-effective amendment filed pursuant to Rule 462(c) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering.    ¨

If this form is a post-effective amendment filed pursuant to Rule 462(d) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering.    ¨

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

 

  Large accelerated filer    ¨      Accelerated filer                    ¨
  Non-accelerated filer      x   (Do not check if a smaller reporting company)    Smaller reporting company   ¨

 

 

CALCULATION OF REGISTRATION FEE

 

 

Title of Each Class

of Securities to be Registered

  Proposed Maximum
Aggregate Offering
Price(1)(2)
  Amount of
Registration Fee

Class A Common Stock, par value $0.01 per share

  $100,000,000   $11,610
 
(1)

Estimated solely for the purpose of computing the amount of the registration fee pursuant to Rule 457(o) under the Securities Act.

(2)

Includes offering price of shares that the underwriters have the option to purchase to cover over-allotments, if any.

 

 

The Registrant hereby amends this Registration Statement on such date or dates as may be necessary to delay its effective date until the Registrant shall file a further amendment which specifically states that this Registration Statement shall thereafter become effective in accordance with Section 8(a) of the Securities Act of 1933 or until the Registration Statement shall become effective on such date as the Commission, acting pursuant to said Section 8(a), may determine.

 

 

 


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The information in this prospectus is not complete and may be changed. We may not sell these securities until the registration statement filed with the Securities and Exchange Commission is effective. This prospectus is not an offer to sell these securities and we are not soliciting offers to buy these securities in any state where the offer or sale is not permitted.

 

PRELIMINARY PROSPECTUS (Subject to Completion)

Issued May 13, 2011

            Shares

LOGO

BATS Global Markets, Inc.

CLASS A COMMON STOCK

 

 

BATS Global Markets, Inc. is offering            shares of Class A common stock, and the selling stockholders identified in this prospectus are offering             shares of Class A common stock. We will not receive any proceeds from the sale of our Class A common stock by the selling stockholders in this offering. This is our initial public offering, and no public market exists for our shares. We anticipate that the initial public offering price will be between $             and $             per share.

Each share of our Class A common stock is entitled to one vote, whereas each share of our Class B common stock, which primarily will be held by our strategic investors identified in this prospectus, is entitled to five votes. Upon completion of this offering, our strategic investors will collectively own approximately     % of the total voting power of our outstanding capital stock.

 

 

Subject to approval by the Securities and Exchange Commission of the listing rules of BATS Exchange, Inc. (BZX), we intend to list the Class A common stock on BZX under the symbol “BATS.”

 

 

Investing in our Class A common stock involves risks. See “Risk Factors” beginning on page 14.

 

 

PRICE $             A SHARE

 

 

 

     Per Share      Total  

Price to public

   $                        $                    

Underwriting discounts and commissions

   $         $     

Proceeds to BATS

   $         $     

Proceeds to selling stockholders

   $         $     

                     have granted the underwriters the right to purchase an additional             shares of Class A common stock to cover over-allotments.

The Securities and Exchange Commission and state securities regulators have not approved or disapproved these securities or determined if this prospectus is truthful or complete. Any representation to the contrary is a criminal offense.

The underwriters expect to deliver the shares of Class A common stock to purchasers on                     , 2011.

 

 

 

Morgan Stanley   Citi   Credit Suisse

                    , 2011


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TABLE OF CONTENTS

 

 

 

     Page  

Prospectus Summary

     1   

Risk Factors

     14   

Special Note Regarding Forward-Looking Statements

     32   

Chi-X Europe Acquisition

     33   

Unaudited Selected Pro Forma Financial Data

     34   

Reclassification and Stock Split

     39   

Use of Proceeds

     40   

Dividend Policy

     40   

Capitalization

     41   

Dilution

     43   

Selected Financial and Operating Data

     45   

Management’s Discussion and Analysis of Financial Condition and Results of Operations

     50   

Business

     86   

Regulation

     104   

Management

     113   

Executive Compensation

     119   

Certain Relationships and Related Transactions

     137   

Principal and Selling Stockholders

     140   

Description of Capital Stock

     142   

Material U.S. Federal Tax Considerations for Non-U.S. Holders of Class A Common Stock

     151   

Shares Eligible for Future Sale

     153   

Underwriters (Conflicts of Interest)

     156   

Validity of Class A Common Stock

     161   

Experts

     161   

Where You Can Find More Information

     161   

Appendix

     A-1   

Index to Consolidated Financial Statements

     F-1   

 

 

We, the selling stockholders and the underwriters have not authorized anyone to provide you with any information other than that contained in this prospectus or in any free writing prospectus prepared by or on behalf of us or to which we have referred you. We, the selling stockholders and the underwriters take no responsibility for, and can provide no assurance as to the reliability of, any other information that others may give you. We, the selling stockholders and the underwriters are offering to sell, and seeking offers to buy, shares of our Class A common stock only in jurisdictions where offers and sales are permitted. The information contained in this prospectus is accurate only as of the date of this prospectus, or other earlier date stated in this prospectus, regardless of the time of delivery of this prospectus or of any sale of our Class A common stock.

 

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PROSPECTUS SUMMARY

This summary highlights information contained elsewhere in this prospectus. This summary may not contain all of the information that you should consider before deciding to invest in our Class A common stock. You should read this entire prospectus carefully, including the “Risk Factors” section and the financial statements and the notes to those statements included in this prospectus.

In this prospectus, “BATS,” the “company,” “we,” “us” and “our” refer to BATS Global Markets, Inc. and its consolidated subsidiaries: BZX and BYX (each, a national securities exchange), BATS Trading (a broker-dealer) and BATS Trading Limited (operator of our pan-European multilateral trading facility, which we refer to as BATS Europe). Except as the context otherwise requires, all share and per-share information (other than financial information included in our consolidated financial statements or derived from them) give effect to our reclassification and              -for-              stock split to be consummated in conjunction with this offering, as described under “Reclassification and Stock Split.” We have defined certain industry-related and other terms in a glossary appended to this prospectus. Please see the glossary for our definition of “market share” and other terms.

Our Company

We are an innovative global financial technology company that develops and operates electronic markets for the trading of listed cash equity securities in the United States and Europe and listed equity options in the United States. In addition to being the third largest exchange operator in the United States after NYSE Euronext and The NASDAQ OMX Group, Inc., we operate the second largest pan-European multilateral trading facility, or MTF, in terms of market share. For the first quarter of 2011, we had a 10.8% share of the U.S. equity market and a 2.1% share of the U.S. equity options market. In Europe, for the same period, we had a 6.2% share of European trading in the securities available for trading on BATS Europe. In February 2011, we signed a definitive agreement to acquire, subject to regulatory approval, Chi-X Europe, the operator of the largest pan-European MTF. For the first quarter of 2011, Chi-X Europe had a 17.0% share of European trading in the securities available for trading on Chi-X Europe.

In the United States, we operate two national securities exchanges, BZX and BYX. Both trade listed cash equity securities and exchange-traded products, such as exchange-traded funds, or ETFs, but each targets different market segments by offering different pricing alternatives. BZX also operates a market for trading listed equity options. In Europe, our MTF offers trading in listed cash equity securities from within 25 European indices, in addition to ETFs, exchange-traded commodities and international depositary receipts. Our platform is designed to facilitate price discovery by encouraging the quoting of competitive, displayed prices. Our platform also offers opportunities to post undisplayed, or “dark,” trading interest on our U.S. and European order books, and in Europe, we operate a separate dark pool.

Our principal objective is to make markets better by minimizing inefficiencies and mitigating trade execution risk for market participants. Unlike traditional market operators, we are a technology company at our core, and we developed, own and operate the BATS trading platform. Our proprietary platform powers all of our markets and is designed to offer one of the fastest and most reliable trading systems available.

Our History

We were formed in 2005 as an alternative to the New York Stock Exchange, or NYSE, and The NASDAQ Stock Market, or NASDAQ, in response to increased consolidation among U.S. listed cash equity market centers. In January 2006, we launched our electronic communication network, or ECN, a type of alternative trading system, or ATS, which initially focused on the trading of NASDAQ-listed securities. We began trading in American Stock Exchange (now NYSE Amex)-listed securities in May 2006 and in NYSE-listed securities in February 2007. We entered the European market in October 2008 when we launched our MTF, BATS Europe. In

 

 

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November 2008, we converted our ECN to a national securities exchange, BZX, which allowed us to participate in and earn market data fees from the U.S. tape plans, reduce our clearing costs and operate a primary listings business, which we recently announced plans to launch. In February 2010, we expanded into a new asset class by offering trading of listed equity options on BZX. In order to grow our U.S. market share, in October 2010, we launched BYX, a second national securities exchange for trading listed cash equity securities.

Industry Overview

Significant regulatory and technological developments have transformed the markets in which we operate and have been the primary drivers of our growth and development:

 

   

U.S. Listed Cash Equity Securities. Several regulatory developments, together with innovations in technology and improvements in the speed of communication, have fundamentally changed the way U.S. listed cash equity markets operate. Notable developments that encouraged the creation of alternative markets, like our original ECN, included:

 

  Ø  

the adoption of the “order handling” rules in 1997, which facilitated the growth of ECNs as alternatives to national securities exchanges for displaying and executing orders;

 

  Ø  

the move to decimal pricing in 2000, which resulted in narrower trading spreads, providing automated market makers with an advantage over traditional market makers; and

 

  Ø  

the adoption of Regulation NMS in 2005, which provided price protection for each exchange’s best displayed quotes that are electronically accessible for immediate trade execution, and resulted in a dramatic shift to electronic trading as exchanges automated their trading systems to take advantage of this price protection.

 

   

European Listed Equity Securities. The implementation of the Market in Financial Instruments Directive, or MiFID, in 2007 marked a fundamental change in the European market for trading listed cash equity securities. MiFID was designed to increase competition in pan-European trading and authorized the creation of MTFs. In particular, to create competition among markets, MiFID abolished the “concentration rule,” which required firms to route orders only to national stock exchanges, and extended the concept of “passporting,” which allowed firms authorized to carry on business in one European Economic Area, or EEA, member state to carry on business in other EEA member states.

 

   

U.S. Listed Equity Options. The most significant recent changes within the U.S. listed equity options market have been the move to penny-increment price quotes and the shift away from the traditional pricing model for executing trades. The conversion of the U.S. listed equity options market from nickel- or dime-increment price quotes to penny-increment price quotes began in February 2007 and has contributed to significant growth in overall options market volume, particularly among electronic traders. Additionally, the traditional exchange pricing model in the U.S. listed equity options market is increasingly being supplanted by a pricing model common in the U.S. listed cash equities market that we believe encourages more aggressive competition and better price discovery.

Our Competitive Strengths

As a result of these industry developments, new trading centers like ours are better able to compete against incumbent exchanges based on technology, customer experience and price. We believe that the following competitive strengths position us well to capitalize on these industry dynamics:

 

   

Leading Proprietary Technology Platform. Unlike traditional market centers, we are a technology company at our core. We developed, own and operate the BATS trading platform, which we designed to optimize reliability, speed, scalability and versatility.

 

  Ø  

Our trading platform has experienced very low downtime, as demonstrated by the fact that in 2009 and 2010, BZX was immediately and automatically accessible 99.947% and 99.999% of the time,

 

 

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respectively. We believe that this reliability gives our customers an additional incentive to use our platform to mitigate trade execution risk, especially in times of extreme market volatility.

 

  Ø  

Our average latency, which measures the time that it takes for us to process an order message, has decreased 85% from over 930 microseconds in January 2007 to approximately 140 microseconds in the first quarter of 2011.

 

  Ø  

For the first quarter of 2011, BZX processed approximately 22,000 order messages per second on average. At times, BZX has processed as many as 300,000 order messages per second, and in testing, our platform has demonstrated its ability to process more than one million order messages per second on a sustained basis.

 

  Ø  

In order to continuously implement new enhancements to our platform, new releases of software are deployed multiple times per month. Because we use the same technology platform across all of our markets, new releases can be deployed simultaneously in all of our markets.

 

   

Significant Operating Leverage. The scalability of our technology platform and the efficiency of our operations allow us to continue to grow with limited additional capital investment. We use technology to leverage our products and employees across multiple asset classes and geographies. As a result, we are able to operate with lower overhead than many incumbent exchanges. In addition, as a new business, we are not burdened by legacy infrastructure. With only 114 employees globally as of March 31, 2011, including 79 at our headquarters in the Kansas City area, we have captured substantial market share from traditional exchanges in the United States and Europe while maintaining substantially lower fixed costs.

 

   

Commitment to Competitive and Innovative Pricing. Due to our operating leverage, we are able to profitably employ an aggressive, low-spread pricing strategy, which we believe provides us with an important competitive advantage. In addition, we have employed innovative, and in some cases, disruptive pricing strategies to increase our market share. In connection with launching new markets, we have often offered pricing specials, which may generate short-term losses, but generally result in significant growth in long-term market share as customers have continued to use our markets even after pricing specials end. For example, after our pricing special in January 2007, our market share of trading in NASDAQ-listed cash equity securities increased from 4.9% at the beginning of that month to 9.6% at the end of that month and averaged 8.0% per month for the remainder of that year. In addition, we recently began providing customers who execute a specified minimum volume with more favorable pricing for listed equity options orders posted on our market that improve the then current national best bid or best offer. This in turn provides better execution prices for other customers. We initiated such pricing on our U.S. listed equity options market in January 2011, and our share of the U.S. equity options market increased from 0.7% for the month of December 2010 to 2.9% for the month of March 2011.

 

   

Demonstrated Ability to Rapidly Execute on Market Opportunities. We have demonstrated an ability to quickly and successfully capitalize on new opportunities in the United States and internationally:

 

  Ø  

we were originally founded in June 2005 and, with just 13 employees, launched trading approximately seven months later;

 

  Ø  

we executed our first trades on BATS Europe in October 2008, seven months after receiving board approval to enter the European market;

 

  Ø  

when we transitioned our trading platform in the United States from an ECN to a national securities exchange, we obtained Securities and Exchange Commission, or SEC, approval in August 2008, approximately 10 months after our initial filing, and launched the exchange three months later;

 

 

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  Ø  

we began trading listed equity options in the United States in February 2010, eight months after board approval; and

 

  Ø  

we applied to operate a second national securities exchange, BYX, in October 2009; we successfully secured SEC approval within 10 months, and we launched the exchange two months later.

 

   

Innovative Products and Services. As part of our commitment to deliver a differentiated customer experience, we have developed a suite of innovative order types, risk management tools and other products and services to address our customers’ needs. For example, we offer several products that enable our customers to monitor their order handling on our markets in real time, such as our user dashboard and latency reports, both of which are web-based tools designed to provide customers with real-time information about their connectivity to our platform and the speed at which their orders are processed and executed within our markets. We also operate one of the few market centers in Europe that offers routing services to other venues that publicly display quotes, or lit venues, which we believe provides an added incentive to use our market.

 

   

Partnership Approach with Customers. We were formed in 2005 by David Cummings, one of our directors and the chairman of Tradebot Systems, and 12 former employees of Tradebot Systems, which is a leading proprietary electronic trading firm. Through a series of investments, we also gained the sponsorship of affiliates of Bank of America Merrill Lynch, Citi, Credit Suisse, Deutsche Bank, GETCO, J.P. Morgan, Lehman Brothers, Lime Brokerage, Morgan Stanley and WEDBUSH. As a result, we benefit from access to the strategic insights and industry expertise of some of the most active market participants. In an effort to continue this collaborative relationship, we will issue high-vote Class B common stock in conjunction with this offering to our existing stockholders and institute various transfer restrictions on our common stock to be held by them following this offering. We believe that these measures will encourage continued meaningful ownership by stockholders affiliated with users of our markets following this offering. In addition, our board remains composed of members with strong industry ties who we believe will continue to provide important strategic insight and industry expertise.

 

   

Seasoned Management Team with a Core Focus on Technology. Our management team has extensive experience in financial market operations with a deep background in technology. In addition, a large portion of our management team has worked together since our inception. We believe that our management team has demonstrated its ability to grow our business through continued product and technological innovations and that our team of technology professionals, which includes most of the original technical architects of our platform, is among the best in the industry.

Our Growth Strategies

We believe that we are well positioned to leverage our competitive strengths to enhance our market position and expand into other countries and asset classes. We continually analyze new opportunities and, in particular, intend to pursue the following growth strategies:

 

   

Develop Additional Products and Services to Enhance Our Market Penetration and Profitability. We believe there are significant opportunities to generate additional revenue by expanding customer access to our markets and services, offering additional trade execution choices and enhancing our market data products. For example, we recently submitted a proposal to the SEC to create an innovative directed order program on our U.S. listed equity options market designed to provide more competitive execution prices for our customers’ retail clients. Also, we recently announced our plans to launch a primary listings business in the United States, which we expect to be a competitive alternative to the incumbent exchanges. In addition, while we do not currently charge for our primary real-time market

 

 

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data products, in 2010, we began offering new value-added market data for a fee. In Europe, we intend to focus our efforts on acquiring additional customers and on deepening our penetration of continental Europe by, among other things, leveraging our position as one of the few market centers providing order routing services to other lit venues.

 

   

Expand into New Asset Classes and Broaden Our Geographic Reach. We plan to continue to expand into new asset classes and new countries where we see opportunities to leverage our technology platform to capture market share. We are currently considering a variety of opportunities, including the trading of U.S. Treasury securities and other fixed income products, futures, currencies and other derivative products. In addition, we recently entered into a memorandum of understanding with Claritas, a Brazilian asset management firm, to explore opportunities in the Brazilian market, including the potential creation of a new exchange in Brazil.

 

   

Leverage Chi-X Europe Acquisition. We believe that our combination with Chi-X Europe, which we expect to complete during the second quarter of 2011, will further our position as a leading transatlantic exchange operator and will solidify us as a preeminent pan-European trading venue. We expect to benefit from synergies as a result of the acquisition, including the transition of Chi-X Europe to our trading platform, which we expect to be completed during the fourth quarter of 2011. We believe the combination will improve our competitive position, enhance our profitability through scale and cost efficiencies and provide us additional opportunities to influence European market structure developments for the benefit of our customers.

 

   

Pursue Strategic Opportunities. We intend to seek additional opportunities to grow through strategic alliances or acquisitions that are complementary to our business or that enable us to enter new markets or provide new products or services. Our focus will be on opportunities that we believe can enhance or benefit from our technology platform, provide significant market share and profitability and are consistent with our corporate culture. We believe that the establishment of a public trading market for our common stock will enhance our ability to pursue strategic opportunities by providing a currency with which to execute future acquisitions.

Ownership Structure

In conjunction with this offering, we intend to reclassify each share of our common stock which has been designated as Voting Common Stock as four shares of Class A common stock and one share of Class B common stock and each share of our common stock which has been designated as Non-Voting Common Stock as four shares of Non-Voting Class A common stock and one share of Non-Voting Class B common stock. Each share of Class A common stock will be entitled to one vote per share, and each share of Class B common stock will be entitled to five votes per share. Non-Voting Class A common stock and Non-Voting Class B common stock will not be entitled to vote, except as required by applicable law. See “Reclassification and Stock Split.” Class A common stock not sold in this offering and Non-Voting Class A common stock will be subject to a restriction on transfer for one year from the completion of this offering, and Class B common stock and Non-Voting Class B common stock will be subject to a three-year transfer restriction, subject to certain exceptions. See “Description of Capital Stock.”

As of March 31, 2011, ten affiliates of our customers, whom we refer to as our strategic investors, will collectively own approximately              shares of our Class A common stock and approximately              shares of our Class B common stock, representing approximately      % of the total voting power of our outstanding capital stock. These strategic investors are affiliates of Bank of America Merrill Lynch, Citi, Credit Suisse, Deutsche Bank, GETCO, J.P. Morgan, Lime Brokerage, Morgan Stanley, Tradebot Systems and WEDBUSH.

 

 

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Risk Factors

Investing in our Class A common stock involves substantial risk. Please read “Risk Factors” beginning on page 13 for a discussion of certain factors you should consider in evaluating an investment in our Class A common stock. Some of these risks include:

 

   

intense competition with a broad range of market participants in both the United States and Europe and further consolidation and alliances among our competitors which could impair our competitive position;

 

   

our lack of revenue diversification, which may adversely affect our operating results and place us at a competitive disadvantage;

 

   

regulatory changes and changes in market structure in response to the global economic crisis, which could have a material adverse effect on our business;

 

   

a significant percentage of our total revenues that is generated from, and significant liquidity in our markets that is provided by, customers who are affiliates of our strategic investors, who are not contractually obligated to continue to use our services or purchase our products and who also use the services of our competitors;

 

   

control of us by our strategic investors, whose interests may differ from those of other stockholders;

 

   

the failure to obtain requisite regulatory approval to complete our acquisition of Chi-X Europe or the inability to successfully integrate Chi-X Europe or realize any or all of the expected benefits associated with the acquisition;

 

   

dependence on third-party clearing and other service providers; and

 

   

potential system limitations, failures or security breaches, which could harm our business.

Conflicts of Interest

Morgan Stanley & Co. Incorporated, one of the underwriters, is an affiliate of one of our strategic investors, Strategic Investments I, Inc. Since such strategic investor beneficially owns more than 10% of our outstanding common stock, a “conflict of interest” is deemed to exist under Rule 5121 of the Conduct Rules of the Financial Industry Regulatory Authority, or FINRA. Accordingly, this offering will be made in compliance with the applicable provisions of Rule 5121. Pursuant to Rule 5121, a “qualified independent underwriter” (as defined in Rule 5121) must participate in the preparation of the prospectus and perform its usual standard of due diligence with respect to the prospectus.              has agreed to act as qualified independent underwriter for the offering and to perform a due diligence investigation and review and participate in the preparation of the prospectus. See “Underwriters.”

Corporate Information

BATS Holdings, Inc. was incorporated in Delaware in June 2007. In January 2008, BATS Trading, our predecessor, and BZX became wholly-owned subsidiaries of BATS Holdings, Inc., and in March 2008, we incorporated BATS Trading Limited as a subsidiary of BATS Holdings, Inc. In December 2008, we changed the name of BATS Holdings, Inc. to BATS Global Markets, Inc. Following our pending acquisition of Chi-X Europe, it will become a wholly-owned subsidiary and will be included in our European Equities segment.

We are headquartered in the Kansas City area with additional offices in New York and London. Our principal executive offices are located at 8050 Marshall Drive, Suite 120, Lenexa, Kansas 66214, and our telephone number is (913) 815-7000. Our website is www.batstrading.com. Information contained on our website is not incorporated by reference into this prospectus.

 

 

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THE OFFERING

 

Class A common stock offered:

     

By us

      shares

By the selling stockholders

      shares
           

Total

      shares
           

Common stock to be outstanding after this offering:

     

Class A common stock

      shares

Class B common stock

      shares

Non-Voting Class A common stock

      shares

Non-Voting Class B common stock

      shares
           

Total

      shares
           

Over-allotment option

      shares of Class A common stock from

Voting rights:

  

Class A common stock

     One vote per share

Class B common stock

     Five votes per share

Non-Voting Class A common stock

     Only as required by applicable law

Non-Voting Class B common stock

     Only as required by applicable law

Transfer restrictions:

  

Class A common stock sold in this offering

     None

Class A common stock not sold in this offering

     One year

Class B common stock

     Three years

Non-Voting Class A common stock

     One year

Non-Voting Class B common stock

     Three years
    
 
 
See “Description of Capital Stock—Common Stock—
Transfer Restrictions” for certain exceptions to the transfer
restrictions.

Use of proceeds

    
 
 
 
 
 
 
 
 
We estimate that our net proceeds from this offering will be
approximately $            million, based on an assumed initial
public offering price of $            per share (the mid-point of
the price range set forth on the cover page of this prospectus)
and after deducting underwriting discounts and commissions
and estimated offering expenses payable by us of
$            million. We intend to use the net proceeds received
by us in connection with this offering for general corporate
purposes.
    
 
 
We will not receive any proceeds from the sale of our
Class A common stock by the selling stockholders in this
offering. See “Use of Proceeds.”

Dividend policy

    
 
 
 
 
We do not currently intend to pay dividends on our common
stock. We plan to retain any earnings for use in the
operation of our business and to fund future growth. Any
future determination to pay dividends will be at the
discretion of our board of directors.

BZX symbol

     BATS

 

 

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Unless the context requires otherwise, all references to the number of shares of our Class A common stock, Non-Voting Class A common stock, Class B common stock and Non-Voting Class B common stock to be outstanding after this offering are based on the number of shares outstanding as of March 31, 2011, giving effect to the Chi-X Europe acquisition and our reclassification and             -for-              stock split to be consummated in conjunction with this offering, as described under “Reclassification and Stock Split,” but excluding:

 

   

             shares of Class A common stock issuable upon the exercise of outstanding stock options with a weighted average exercise price of $             per share;

 

   

an aggregate of             shares of Class A common stock reserved for future issuance under our stock option plans as of             .

Unless otherwise indicated, all information in this prospectus assumes that the underwriters do not exercise their over-allotment option to purchase up to              additional shares of Class A common stock from              in this offering.

 

 

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SUMMARY HISTORICAL AND PRO FORMA FINANCIAL AND OPERATING DATA

The following summary historical and pro forma financial and operating data should be read in conjunction with “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” the unaudited pro forma financial statements and the accompanying notes and the consolidated financial statements and the accompanying notes, in each case included elsewhere in this prospectus. We have derived the summary consolidated statements of operations data for the years ended December 31, 2010, 2009 and 2008 and the statement of financial condition data as of December 31, 2010 and 2009 from our audited consolidated financial statements and related notes included elsewhere in this prospectus. We have derived the summary consolidated statement of financial condition data as of December 31, 2008 from our audited consolidated financial statements which are not included in this prospectus. We have derived the unaudited pro forma summary consolidated statement of operations data for the year ended December 31, 2010 and the unaudited pro forma summary consolidated statement of financial condition data as of December 31, 2010 from the unaudited consolidated pro forma financial statements and related notes included in this prospectus. The unaudited summary consolidated pro forma statement of operations and the unaudited summary consolidated pro forma statement of financial condition are intended to provide information about how the Chi-X Europe acquisition might have affected our historical financial statements if it had been consummated as of January 1, 2010. The following unaudited summary consolidated pro forma financial data are provided for informational purposes only and do not necessarily reflect the financial position or results of operations that would have actually resulted had the Chi-X Europe acquisition occurred as of the date indicated, nor should they be taken as necessarily indicative of our future results of operations or financial position.

 

 

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     Year Ended December 31,  
       2010 Pro Forma       2010      2009      2008  
     (in millions)  

Consolidated Statements of Operations Data:

          

Revenues:

          

Transaction fees

   $ 733.4      $ 668.3       $ 730.1       $ 642.3   

Market data fees

     46.0        46.0         50.7         41.5   

Regulatory transaction fees(1)

     111.0        111.0         125.0         6.1   

Other

     9.5        9.5         2.4         —     
                                  

Total revenues

     899.9        834.8         908.2         689.9   

Cost of revenues:

          

Liquidity payments

     582.2        541.7         618.2         539.6   

Routing, clearing and other fees

     82.9        82.9         86.1         106.5   

Section 31 fees(1)

     111.0        111.0         125.0         6.1   
                                  

Total cost of revenues

     776.1        735.6         829.3         652.2   
                                  

Revenues less cost of revenues

     123.8        99.2         78.9         37.7   

Operating expenses:

          

Compensation and benefits

     46.5        30.6         25.1         18.0   

Other operating expenses

     58.5        33.8         23.5         16.9   
                                  

Total operating expenses

     105.0 (2)      64.4         48.6         34.9   

Operating income

     18.8        34.8         30.3         2.8   

Interest and investment income and other income (expense)

     0.4        0.2         0.2         5.0   
                                  

Income before income tax provision

     19.2        35.0         30.5         7.8   

Income tax provision

     7.8        15.2         6.0         0.6   
                                  

Net income

   $ 11.4      $ 19.8       $ 24.5       $ 7.2   
                                  

 

     Year Ended December 31,  
       2010 Pro Forma        2010      2009      2008  

Basic earnings per share

   $ 0.51       $ 1.11       $ 1.38       $ 0.41   

Diluted earnings per share

   $ 0.50       $ 1.08       $ 1.35       $ 0.40   

Basic weighted average common shares outstanding

     22,180,981         17,814,233         17,741,333         17,741,045   

Diluted weighted average common shares outstanding

     22,670,160         18,303,412         18,175,746         17,969,325   

 

(1) 

As national securities exchanges, BZX and BYX are assessed fees pursuant to Section 31 of the Securities Exchange Act of 1934, as amended, which we refer to as the Exchange Act. Section 31 fees are assessed on the notional value traded and are designed to recover the costs to the government of supervision and regulation of securities markets and securities professionals. Section 31 fees are paid directly to the SEC, and our national securities exchanges then pass these costs along to our members as regulatory transaction fees, recognizing these amounts as incurred in cost of revenues and revenues, respectively.

(2) 

Includes $9.0 million of pro forma adjustments related to non-recurring, transaction-related expenses, including severance, retention bonuses and professional fees.

 

 

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     As of December 31,  
       2010 Pro Forma        2010      2009      2008  
     (in millions)  

Consolidated Statement of Financial Condition Data:

           

Cash and cash equivalents

   $ 170.4       $ 150.0       $ 107.7       $ 66.7   

Total assets

     534.7         256.5         239.0         164.2   

Stockholders’ equity

     422.6         198.7         172.8         144.4   

Selected Operating Data

The following table presents selected operating data for our three segments: U.S. Equities, European Equities and U.S. Options for the periods presented. We launched BATS Europe, which is reported in our European Equities segment, in October 2008 and began trading in listed equity options on BZX, which is reported in our U.S. Options segment, in February 2010. The information set forth below is not necessarily indicative of our future operations and should be read in conjunction with “Management’s Discussion and Analysis of Financial Condition and Results of Operations.”

 

     Year Ended December 31,  
           2010                 2009                 2008        
     (in millions except for trading days, transaction
fees and percentages)
 

U.S. Equities:

      

Average daily volume (ADV):

      

Matched shares

     888.1        1,024.6        852.9   

Routed shares

     134.9        148.8        146.4   
                        

Total shares

     1,023.0        1,173.4        999.3   
                        

Number of trading days

     252        252        253   

Transaction fees per one hundred shares matched or routed

   $ 0.249      $ 0.245      $ 0.254   

Market share(1)(2)

     10.5     10.5     9.7

European Equities:

      

Average daily notional value (ADNV):

      

Matched notional value

   1,953.2      731.0      118.3   

Routed notional value

   30.7        —          —     

Total shares (matched and routed)

     268.0        105.3        19.5   

Number of trading days

     258        257        42   

Transaction fees per Euro notional value(3)

     0.0028     0.0027     0.0030

Market share(2)(4)

     5.5     2.7     0.6

U.S. Options:

      

Total volume:

      

Matched contracts

     15.1        —          —     

Routed contracts

     10.0        —          —     
                        

Total contracts

     25.1        —          —     
                        

Number of trading days

     215       

Transaction fees per contract matched or routed

   $ 0.262        —          —     

Market share(2)(5)

     0.5     —          —     

 

 

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     Year Ended December 31,  
           2010                 2009                 2008        
     (in millions except for percentages,
members/participants, latency and
headcount)
 

Other Data:

      

EBITDA(6)

   $ 41.2      $ 34.8      $ 8.1   

EBITDA margin(7)

     41.6     44.1     21.6

Adjusted EBITDA(6)

   $ 47.3      $ 38.2      $ 10.8   

Adjusted EBITDA margin(8)

     47.7     48.4     28.7

Operating income as a percentage of revenues less cost of revenues

     35.1     38.4     7.6

Capital expenditures

   $ 6.4      $ 5.7      $ 10.7   

Members/participants (as of period end):

      

BZX

     388        382        297   

BYX

     202        —          —     

U.S. Options

     60        —          —     

BATS Europe

     88        74        34   

Up-time percentage(9)

     99.999     99.947     (10) 

BZX latency(11)

     164.4        247.0        337.7   

Employee headcount

     110        97        84   

Chi-X Europe Data:

      

Market share(2)(12)

     17.4     12.5     7.8

Members/participants

     133        112        82   

 

(1) 

Represents our share of the U.S. equity market.

(2) 

Please see the glossary for our definition of “market share.”

(3) 

Represents transaction fees divided by total Euro notional value of transactions.

(4) 

Represents our share of European trading in the securities available for trading on BATS Europe for the years ended December 31, 2010 and 2009 and for the period from October 31, 2008 (the date BATS Europe commenced trading) to December 31, 2008.

(5) 

Represents our share of the U.S. equity options market for the period from February 26, 2010 (the date we commenced trading U.S. listed equity options) to December 31, 2010.

(6) 

“EBITDA” is defined as income before interest, income taxes, depreciation and amortization. Adjusted EBITDA is defined as EBITDA before stock-based compensation expense. EBITDA and Adjusted EBITDA do not represent, and should not be considered as, alternatives to net income or cash flows from operations, each as determined in accordance with generally accepted accounting principles in the United States, or U.S. GAAP. We have presented EBITDA and Adjusted EBITDA because we consider them important supplemental measures of our performance and believe that they are frequently used by analysts, investors and other interested parties in the evaluation of companies. Other companies may calculate EBITDA and Adjusted EBITDA differently than we do. EBITDA and Adjusted EBITDA have limitations as analytical tools, and you should not consider them in isolation or as substitutes for analysis of our results as reported under U.S. GAAP.

 

 

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The following is a reconciliation of net income to EBITDA and Adjusted EBITDA:

 

     Year Ended December 31,  
     2010     2009     2008  
     (in millions)  

Net income

   $ 19.8      $ 24.5      $ 7.2   

Interest

     (0.3     (0.5     (2.7

Income tax provision

     15.2        6.0        0.6   

Depreciation and amortization

     6.5        4.8        3.0   
                        

EBITDA

     41.2        34.8        8.1   

Stock-based compensation expense

     6.1        3.4        2.7   
                        

Adjusted EBITDA

   $ 47.3      $ 38.2      $ 10.8   
                        

 

(7) 

EBITDA margin represents EBITDA divided by revenues less cost of revenues.

(8) 

Adjusted EBITDA margin represents Adjusted EBITDA divided by revenues less cost of revenues.

(9) 

“Up-time percentage” represents the portion of the time in the period shown when BZX’s quotations were immediately and automatically accessible, as defined in the rules under Regulation NMS.

(10) 

We launched BZX in November 2008. From the launch of BZX through December 31, 2008, we had a 100% up-time percentage.

(11) 

BZX latency represents the average time in microseconds (one-millionth of a second) required to process customer orders during the period shown from the time they were received and read by our gateway software process assigned to a customer until the corresponding order acknowledgment or cancel message from our matching engine was received by our gateway software process and was ready to be sent back to the customer.

(12) 

Represents Chi-X Europe’s share of European trading in the securities available for trading on Chi-X Europe.

 

 

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RISK FACTORS

You should carefully consider the following risks and all of the information set forth in this prospectus before investing in our Class A common stock.

Risks Relating to Our Business

We face intense competition and compete with a broad range of market participants in both the United States and Europe. Further consolidation and alliances among our competitors could impair our competitive position.

The market for trade execution services is intensely competitive in the asset classes and geographies in which we operate. Increased competition may result in a decline in our share of trading activity and a decline in our revenues from transaction fees and market data fees, thereby adversely affecting our operating results.

In the United States, the competition among exchanges and other execution venues has become more intense with regulatory changes. The U.S. listed cash equity securities marketplace has evolved dramatically in recent years following the SEC’s adoption of Regulation NMS. We compete in the U.S. listed cash equity securities market against NYSE Euronext, NASDAQ OMX, Direct Edge, other regional exchanges and several alternative trading systems, or ATSs. Market participants now have multiple venues for the execution of orders, including national securities exchanges as well as numerous over-the-counter options, including ATSs operating “dark pools” that do not publicly display quotations, ECNs and broker-dealers who internalize orders. For example, “dark pool” venues compete with us by offering low cost executions and differ from lit ATSs and MTFs in the degree of transparency with respect to quotes and trades they offer and in restrictions on who may access these systems. In addition, various broker-dealers internalize their order flow or route their orders to third-party ATSs. Based on publicly available data regarding reported trades, as of December 31, 2010, over-the-counter trading accounted for in excess of 30% of consolidated U.S. equity volume. If over-the-counter trading expands further, it will adversely affect our market share in the United States.

The market for execution services within listed cash equity securities in Europe has become significantly more competitive since the Market in Financial Instruments Directive, or MiFID, went into effect in 2007. MiFID created a structure for pan-European competition versus incumbent exchange monopolies throughout the European Union countries. As a result, new MTFs have emerged and have begun to capture significant market share from existing exchanges, particularly the London Stock Exchange, or LSE. Following these developments, LSE acquired a majority interest in Turquoise Global Holdings Limited, or Turquoise, an MTF that offers pan-European trading. Our major competitors in Europe, other than LSE, include NYSE Euronext, Deutsche Börse AG, or Deutsche Börse, NASDAQ OMX, SIX Swiss Exchange and Bolsas y Mercados Españoles, or BME, as well as Turquoise and, prior to the close of our pending acquisition, Chi-X Europe. Some of these competitors have themselves launched MTFs.

The market for the trading of U.S. listed equity options is also intensely competitive, with nine authorized U.S. options exchanges as of March 31, 2011 vying for market share, and is in the midst of dramatic change, driven primarily by recent regulatory changes. Our primary competitors in the options market are the Chicago Board Options Exchange, or the CBOE, NYSE Euronext, NASDAQ OMX, International Securities Exchange Holdings, Inc., or ISE, and Boston Options Exchange Group, LLC, or BOX. Moreover, some products offered uniquely by the CBOE (for example, products based on the VIX volatility index) represent products that are not traded on our platform. In addition, some of our competitors, including NYSE Euronext, NASDAQ OMX and CBOE, offer multiple trading venues for equity options that use different pricing strategies, which allows them to potentially appeal to a broader customer base.

In recent years, the securities trading industry has witnessed increased consolidation among market participants. Additional consolidations and alliances among market participants may create larger internal liquidity pools that may attract trading volume and liquidity away from BZX, BYX and BATS Europe and, therefore, lead to decreased revenues. In addition, consolidations or alliances among our current competitors may

 

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achieve cost reductions or other increases in efficiency, which may allow our competitors to offer lower prices or better customer service than we do. In particular, the recently announced potential mergers of Deutsche Börse with NYSE Euronext and LSE with TMX Group Inc. may result in stronger competitors for us in our existing markets and may also hinder our ability to expand into new markets. For example, these post-merger competitors may be able to achieve efficiencies that allow them to offer lower transaction fees or other financial incentives, which may hinder our ability to stay competitive in the listed cash equity securities market and to penetrate the options market. In addition, these mergers may result in stronger competitors for us than the pre-merger entities as stand-alone businesses in other markets that we may decide to enter, such as futures and other derivative products.

In addition, our strategic investors or their affiliates may already have or may acquire an ownership interest in competing businesses (including national securities exchanges, MTFs, ATSs or ECNs), and they may compete with us, in relation to existing product and service offerings as well as any diversification of our product and service offerings into new asset classes and/or new geographic locations.

If we are unable to compete successfully in this environment, our business, financial condition and operating results may be adversely affected. Also, if our share of total trading volumes decreases relative to our competitors, we may be less attractive to market participants as a source of liquidity, and we may lose additional trading volume and associated transaction fees and market data fees as a result.

Our market data fees and transaction fees may be reduced due to declines in our market share, trading volumes or regulatory changes, and our lack of revenue diversification may adversely affect our operating results and place us at a competitive disadvantage.

We derived 46.4% and 44.8% of our revenues less cost of revenues from market data fees and net transaction fees, respectively, for the year ended December 31, 2010. Market data fees represent our share of tape fees from the U.S. tape plans based on a formula, required by Regulation NMS, which takes into account both trading and quoting activity. For purposes of calculating this percentage, we have not attributed any incremental costs associated with providing trading and quoting information to the U.S. tape plans. Transaction fees represent fees that we earn for trade execution on BZX (including our U.S. listed equity options market), BYX and BATS Europe, whether a trade is executed internally on BZX, BYX or BATS Europe or routed to another market center. Net transaction fees represent transaction fees less the liquidity payments and routing and clearing costs that we incurred to earn those transaction fees.

The occurrence of any event that reduces the amount of market data fees or transaction fees that we receive, whether as a result of fee reductions, declines in market share or trading volumes (or notional volume in the case of BATS Europe) or regulatory changes, will have a direct negative impact on our operating results and future profitability. For example, if our market share of U.S. listed cash equities and U.S. listed equity options trading were to decline, our share of market data fees could also decline. In addition, if the amount of trading volume on BZX, BYX or BATS Europe or notional value traded on BATS Europe decreases, we will lose transaction fees. Moreover, market data fees could decline as a result of a reduction in the numbers of market data users, for example because of consolidation among market data subscribers or due to a decline in professional subscriptions as a result of staff reductions in the financial services industry or otherwise. For a discussion of the factors that may impact trading volumes, see “—Current economic conditions could adversely affect our business and financial condition.”

In addition, our dependence upon revenues derived solely from our transaction-based businesses may place us at a competitive disadvantage. Some of our competitors derive their revenues from more than one source as a result of more diversified product and service offerings. For example, NYSE Euronext and NASDAQ OMX realize substantial revenue from listing fees. In addition, many of our competitors also offer technology outsourcing. As a result, lower transaction fees or market data fees may impact our operating results and future profitability more significantly than our competitors’, providing them with a competitive advantage in pricing their products and services or withstanding a reduction in trading volume.

 

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Our industry is characterized by intense price competition.

The securities trading industry is characterized by intense price competition. We may be required to adjust pricing to respond to actions by new or existing competitors, which could adversely impact operating results. We have also recently begun to compete with respect to the sale of value-added market data such as historical market data and a real-time last sale data feed. If we are unable to compete successfully with respect to the pricing of our services and products, our business, financial condition and operating results may be adversely affected. Furthermore, to attract market share, we offer “inverted” pricing specials from time to time in the United States and Europe that may adversely affect our profitability. As we do not currently have any primary listings on our exchanges (other than our expected self-listing), we do not have the liquidity associated with primary listings and must compete purely on price and technology.

Our revenues are positively correlated with overall market volume, which can be impacted by a number of factors, including market volatility.

A significant percentage of our revenue is tied directly to the volume of securities traded on our markets. Trading volume on our markets can be influenced by a number of factors, including market volatility. In late 2008, we experienced a period of record high trading volume and volatility due to the financial crisis, and similarly, in the first quarter of 2011, we experienced a period of high trading volume and volatility due to the natural disaster affecting Japan and the escalation of armed conflict in the Middle East. We may face a general decline in trading volumes, which could lower our revenues and may adversely affect our operating results if we are unable to offset such falling volumes through increased market share or matched share volume.

Regulatory changes and changes in market structure in response to the global economic crisis could have a material adverse effect on our business.

We operate in a highly regulated industry and are subject to extensive regulation. In recent years, the securities trading industry and, in particular, the securities markets have also been subject to significant regulatory changes. Moreover, in the past two years, the securities markets have been the subject of increasing governmental and public scrutiny in response to the global economic crisis. For example, on July 21, 2010, the Dodd-Frank Wall Street Reform and Consumer Protection Act, or Dodd-Frank, was enacted. Dodd-Frank introduces significant changes to financial industry regulation, although many of its provisions require the adoption of regulations by various federal agencies and departments. We expect Dodd-Frank to impact our business in significant ways, although until final rules have been adopted, it will be difficult to predict all of the effects Dodd-Frank may have on us. In addition, the SEC is considering various responses to the trading events that occurred on May 6, 2010, when the U.S. stock market experienced significant volatility. It is possible that the SEC could take actions that ultimately reduce trading volumes, which could negatively affect our business. For example, on February 28, 2011, the Joint CFTC-SEC Advisory Committee on Emerging Regulatory Issues, or the Joint Advisory Committee, released recommendations regarding regulatory responses to the market events of May 6, 2010. Among other things, the Joint Advisory Committee recommended that the SEC consider whether (i) the market would benefit by changes to maker-taker pricing practices, under which a customer posting an order, or the liquidity “maker,” is paid a rebate for an execution occurring against that order, and a customer executing against an order, or the liquidity “taker,” is charged a fee, (ii) active traders, such as high-frequency traders, should be required to pay additional trading fees and (iii) to adopt requirements to give additional trading priority to displayed prices on other markets, or a “trade-at” rule.

During the next few years, there may be significant changes in the regulatory environment in which we operate our business, although we cannot predict the nature of these changes or their impact on our business at this time. For example, the SEC published a concept release on equity market structure issues in early 2010 that could result in the SEC adopting new regulations or amending existing regulations that affect our business and the businesses of our customers. The SEC’s equity market structure concept release seeks public comment regarding various issues, including co-location, high frequency trading and a potential “trade-at” rule.

 

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Co-location refers to the practice of a trading center offering market participants the opportunity to place their servers in close physical proximity to the trading center’s servers. This practice is intended to minimize network latencies between the market participant’s and the trading center’s servers. New regulations applicable to co-location could have the effect of limiting the services that we are able to offer. High frequency trading typically refers to a trading strategy that involves sending a large number of orders on a daily basis using sophisticated computer algorithms. Any new regulations that slow trading could impact high frequency trading strategies and therefore lead to a reduction in trading volumes. A “trade-at” rule would prohibit any trading center from executing a trade at the national best bid or offer unless the trading center was displaying that price at the time it received the incoming order. As noted above, the Joint Advisory Committee also recommended that the SEC consider adopting a “trade-at” rule. Such a rule could limit the number of orders that we are able to execute internally on BZX or BYX. Regulatory action in any of these areas could significantly impact the competitive landscape, reduce transaction volumes or limit the services that we are able to offer. The public comment period for the concept release closed on April 21, 2010. It is not possible to predict what rules the SEC will propose based on the public comments it has received.

Over the last year the SEC and other regulators have proposed various specific market structure changes. See “Regulation.” Actions on any of the specific regulatory issues currently under review in the United States and Europe could have a material impact on our business. In addition, the SEC has proposed a consolidated audit trail that would be operated by self-regulatory organizations, or SROs, such as BZX and BYX. The SEC estimated that the proposal would cost the industry approximately $4 billion in one-time implementation expenses and involve annual costs of approximately $2.1 billion. We believe our customers would bear the majority of these expenses through increased trading costs, and could result in lower transaction volumes. The SEC also has proposed a large trader reporting system. If enacted, certain market participants may seek to limit their trading to avoid registration as a large trader, which could result in lower transaction volumes for our U.S. business.

Our customers are also highly regulated. The SEC, the Financial Services Authority, or FSA, and other regulatory authorities could impose regulatory changes that could adversely impact the ability of our customers to use our markets. Regulatory changes by the SEC, the FSA or other regulatory authorities could result in the loss of a significant number of customers or a reduction in trading activity on our markets.

The European Union has issued a consultation paper on the review of MiFID and is expected to issue proposals in the spring of 2011. This effort could result in an alteration of the MiFID structure that has encouraged competition among market centers in Europe. The results of this review are uncertain, but could result in less competitive conditions or greater regulation that could increase our costs of operating in Europe.

The concept of a transaction tax also has been advocated by some in the United States and the European Union and has gained support from the European Parliament in the form of a non-binding resolution. There is a possibility that such a tax could gain support as an anti-speculation and deficit reduction measure, in which case it would likely raise trading costs and reduce transaction volumes.

In addition, Dodd-Frank will likely result in exchange trading and clearing of many swaps, which could give greater liquidity and accessibility to derivatives that compete with options traded on our U.S. listed equity options market. Furthermore, the SEC has proposed to cap transaction fees charged by options exchanges similar to the caps applied to equity exchanges. Transaction fee caps would limit the amount of fees that we can charge to access our liquidity and, accordingly, the payments we can make to attract liquidity.

Because we have a limited operating history, it is difficult to evaluate our business and prospects.

Our subsidiary BATS Trading was formed in June 2005, and live trading on our ECN began in January 2006. In addition, certain of our markets, such as our U.S. listed equity options market and BYX, only have a very short operating history. As a result, we have a limited operating history from which you can evaluate our

 

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business and our prospects. We will encounter risks and difficulties frequently experienced by early-stage companies in rapidly evolving industries such as ours. These risks and difficulties include, but are not limited to, our ability to:

 

   

attract and retain customers;

 

   

expand and enhance reliable and cost-effective product and service offerings to customers;

 

   

respond effectively to competitive pressures;

 

   

diversify our sources of revenues;

 

   

respond to regulatory changes or demands;

 

   

maintain adequate control of our expenses;

 

   

operate, support, expand and develop our operations, website, software, communications and other systems;

 

   

manage growth in personnel and operations; and

 

   

increase awareness of our brand or market positioning.

If we are unsuccessful in addressing these risks or in executing our business strategy, our business, financial condition and results of operations may suffer.

We are dependent on the members of our senior management team and other key personnel.

We are highly dependent upon our Chairman, President and Chief Executive Officer, Joe Ratterman. Mr. Ratterman’s talents and leadership have been, and continue to be, critical to our success. The diminution or loss of the services of Mr. Ratterman for any reason, and any negative market or industry perception arising from that diminution or loss, would have a material adverse effect on our business.

Our success also depends largely on the efforts and abilities of the other key members of our senior management team. Many of these individuals have worked together closely since our inception in 2005. Members of our senior management team are employees at will. Accordingly, it is possible that one or more members of our senior management team could resign to work elsewhere. Because each member of our senior management team has a different area of specialization, the departure of any one of these individuals could create a deficiency in one of the core aspects of our business, particularly given our small number of employees relative to our competitors.

We are also dependent on the efforts of our core technology team, many of whom have been with us since inception, and on our ability to recruit and retain highly skilled and often specialized personnel, particularly in light of the rapid pace of technological advances. The level of competition in our industry for individuals with this level of experience or these skills is intense. Significant losses of key personnel, particularly to competitors, could make it difficult for us to compete successfully. In addition, we may be unable to attract and retain qualified management and personnel in the future, including in relation to any diversification of our product and service offerings into new asset classes and/or new geographic locations.

We do not maintain “key person” life insurance policies on any of our executive officers, managers, key employees or technical personnel. The loss of the services of these persons for any reason, as well as any negative market or industry perception arising from those losses, could have a material adverse effect on our business, financial condition and operating results.

We may not be able to keep up with rapid technological and other competitive changes affecting our industry, and we may be unable to further diversify our business.

The markets in which we compete are characterized by rapidly changing technology, evolving industry standards and regulations, frequent enhancements to existing products and services, the adoption of new services and products and changing customer demands. If our platform fails to function as expected, our business would

 

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be negatively affected. In addition, our business, financial condition and operating results may be adversely affected if we cannot successfully develop, introduce or market new services and products or if we need to adopt costly and customized technology for our services and products. Further, our failure to anticipate or respond adequately to changes in technology and customer preferences or any significant delays in product development efforts could have a material adverse effect on our business, financial condition and operating results.

In addition, we will face significant challenges as we seek to diversify our product and service offerings. We may, for example, diversify our business by competing with NYSE Euronext, NASDAQ OMX, Direct Edge and other exchanges for new asset classes and in new geographic locations and new or existing listings. We will face substantial competition from these market centers, some of which have greater brand recognition than we do and offer a broader range of services than we currently offer. Accordingly, we may not be able to increase our revenues or compete successfully by further diversifying our product and service offerings.

We generate a significant percentage of our total revenues from, and are provided with significant liquidity in our markets by, customers who are affiliates of our strategic investors, who are not contractually obligated to continue to use our services or purchase our products and who also use the services of our competitors.

We earn a significant percentage of our revenue from customers who are affiliates of our strategic investors. For 2010, 2009 and 2008, 31.7%, 29.8% and 22.8% of our total revenues, respectively, were generated by affiliates of our strategic investors. In addition, affiliates of our strategic investors also provide us with liquidity for which we provide them with a rebate. In particular, for 2010, 2009 and 2008, an affiliate of one of our strategic investors accounted for 31.0%, 51.0% and 51.4%, respectively, of total liquidity rebates paid. None of our customers is contractually or otherwise obligated to continue to use our services or purchase our products. In addition, affiliates of our strategic investors and our other customers have made, and may continue to make, investments in businesses that directly compete with us. Our customers also trade, and will continue to trade, on markets operated by our competitors. The loss of, or a significant reduction in, participation on our markets by these customers may have a material adverse effect on our business, financial condition and results of operations.

We may not be able to successfully integrate Chi-X Europe, which may result in an inability to realize the anticipated benefits of the Chi-X Europe acquisition, and certain of our and Chi-X Europe’s historic customers may seek to diversify their order flow by directing their orders to other trading venues following our acquisition, which may result in lower market share than would otherwise be implied by combing historical volume numbers.

Rationalizing and coordinating our and Chi-X Europe’s operations will involve complex technological, operational and personnel-related challenges. This process will be time-consuming and expensive and may disrupt the business of the combined company. Difficulties, costs and delays could be encountered with respect to:

 

   

obtaining the requisite regulatory approval to complete the acquisition;

 

   

combining the companies’ operations and systems, which could lead to the combined company not achieving the synergies we anticipate;

 

   

resolving possible inconsistencies in standards, controls, procedures and policies, business cultures and compensation structures between us and Chi-X Europe;

 

   

the diversion of management’s attention from ongoing business concerns and other strategic opportunities;

 

   

the retention of our and Chi-X Europe’s key employees and management;

 

   

the implementation of disclosure controls, internal controls and financial reporting systems at Chi-X Europe to enable the combined company to comply with the requirements of U.S. GAAP and U.S. securities laws and regulations required as a result of the combined company’s status as a reporting company under the Exchange Act;

 

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the coordination of geographically separate organizations;

 

   

possible tax costs or inefficiencies associated with integrating the operations of the combined company;

 

   

possible modification of Chi-X Europe’s operating control standards in order for the combined company to comply with the Sarbanes-Oxley Act and the rules and regulations promulgated thereunder, which is required as a result of the combined company’s status as a reporting company under the Exchange Act; and

 

   

the retention of strategic partners and attraction of new strategic partners.

For these reasons, the combined company may not achieve the anticipated financial and strategic benefits, including cost savings from operational efficiencies and synergies, from the combination of our and Chi-X Europe’s businesses, and any actual cost savings and synergies may be lower than we currently expect and may take a longer time to achieve than we currently anticipate. In addition, we may fail to realize any of the anticipated benefits of the combination of the two companies.

In addition, upon our acquisition of Chi-X Europe, certain of our and Chi-X Europe’s historic customers may seek to diversify their order flow by directing their orders to other trading venues, resulting in lower transaction revenues on a combined basis than we and Chi-X Europe might have generated as separate companies. As a result, our combined volume on a historical basis should not be viewed as indicative of our combined volume following the acquisition.

We may have difficulty executing our growth strategy and managing our growth effectively.

We have experienced significant growth in our business since our inception in 2005 and our transition from operating an ECN, to operating national securities exchanges and an MTF. While our market share has increased, there is no guarantee this will continue in the future. Continuing to grow our business will require increased investment in our facilities, personnel and financial and management systems and controls. Unless our growth results in an increase in our revenues that is proportionate to the increase in our costs associated with this growth, our future profitability will be adversely affected. Furthermore, failure to successfully diversify into new asset classes or new geographies may adversely affect our growth strategy and our future profitability.

As part of our growth strategy, we intend to continue evaluating potential acquisition opportunities and strategic alliances. Any such transaction may be effected quickly, may occur at any time and may be significant in size relative to our existing assets and operations. The market for acquisition targets and strategic alliances is highly competitive, particularly in light of increasing consolidation in the securities trading industry, which may adversely affect our ability to find acquisition candidates or strategic partners that fit our growth strategy and our investment parameters. These transactions involve numerous risks, including, among others:

 

   

failure to achieve financial or operating objectives;

 

   

failure to successfully and timely integrate any operations, products, services or technology we may acquire or combine with in a strategic alliance;

 

   

diversion of management’s and other key personnel’s attention;

 

   

failure to obtain necessary regulatory or other approvals;

 

   

potential loss of customers or personnel; or

 

   

failure to obtain necessary financing on acceptable terms.

Failure to successfully manage any acquisition or strategic alliance we may make in the future could adversely affect our growth strategy and our future profitability. Furthermore, future acquisitions or strategic alliances may require significant resources and may result in significant unanticipated losses, costs or liabilities.

 

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These transactions may also result in our recording additional goodwill and other intangible assets that are susceptible to valuation adjustments as a result of changes in various factors or conditions. For example, following our pending acquisition of Chi-X Europe, we expect to record approximately $248.5 million of goodwill and other intangible assets. We assess the potential impairment of goodwill at least annually, or more frequently when events or changes in circumstances signal indicators of impairment are present. Adverse changes in economic conditions or our operations could affect the assumptions we use to calculate the fair value, which in turn could result in an impairment charge in future periods that would impact our results of operations and financial position.

The regulatory framework under which we operate and new regulatory requirements or new interpretations of existing regulatory requirements could require substantial time and resources for compliance, which could make it difficult and costly for us to operate our business.

We operate in a highly regulated industry and may be subject to regulatory actions or other legal proceedings that could lead to censures, fines or other penalties if we fail to comply with our legal and regulatory obligations. Under current U.S. federal securities laws, changes in the rules and operations of our markets, including our pricing structure, must be reviewed and in many cases explicitly approved by the SEC. The SEC may approve, disapprove or recommend changes to proposals that we submit. In addition, the SEC may delay either the approval process or the initiation of the public comment process. Any delay in approving changes, or the altering of any proposed change, could have an adverse effect on our business, financial condition and operating results. Moreover, the rule filing process has recently been altered by financial regulatory reform legislation. While the changes appear to reduce the inherent time delays for approval of rule changes by exchanges, the details of these changes are not fully known at this time. In addition, we must compete with ATSs that are not subject to the same SEC approval process for changes in rules and operations, including pricing.

Our European business is subject to regulatory oversight in the United Kingdom by the FSA, which through the “passporting” process provides authorization to carry on business in other EEA member states. The authorities may revoke this authorization if we do not suitably carry out our regulated business activities. The authorities are also entitled to request that we adopt measures in order to ensure that we continue to fulfill the authorities’ requirements. Any failure by us to meet these requirements or any revocation by the authorities of our authorization to carry on business in other EEA member states would materially affect our ability to operate a trading venue on a pan-European basis and could adversely affect our business, financial condition and results of operations.

We have self-regulatory obligations that may create conflicts of interests.

We have obligations to regulate and monitor activities in our markets and ensure compliance with applicable law and the rules of our markets by market participants. In the United States, the SEC has previously expressed concern about potential conflicts of interest of “for-profit” exchanges performing the role of an SRO that must oversee and surveil members of the exchange that are also crucial to the exchange’s economic success. Any failure by us to diligently and fairly regulate our markets or to otherwise fulfill our regulatory obligations could significantly harm our reputation, prompt SEC scrutiny and adversely affect our business.

We depend on third-party service providers for certain services that are important to our business. An interruption or cessation of such service by any third party could have a material adverse effect on our business.

We depend on a number of service providers, including but not limited to banking and clearing organizations such as the National Securities Clearing Corporation, or NSCC, and The Options Clearing Corporation, or OCC, and its member clearing firms; the European Multilateral Clearing Facility N.V., or EMCF; data center providers such as Savvis, Inc., which hosts our primary data center in the United States; the Consolidated Tape Association and the Options Price Reporting Authority, LLC, or OPRA; and various vendors

 

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of communications and networking products and services. We cannot assure you that any of these providers will be able to continue to provide these services in an efficient manner or that they will be able to adequately expand their services to meet our needs. An interruption or malfunction in or the cessation of an important service by any third party and our inability to make alternative arrangements in a timely manner, or at all, could have a material adverse impact on our business, financial condition and operating results. In addition, we currently rely on the Financial Industry Regulatory Authority, or FINRA, to perform certain regulatory functions on our behalf pursuant to a regulatory services agreement, or RSA, which terminates in 2011. We recently executed an RSA with CBOE, and during 2011, we will begin relying on CBOE to perform the regulatory functions that are currently performed by FINRA. Under both RSAs, we maintain ultimate responsibility for the regulatory activities. We also rely on Wedbush Securities, an affiliate of one of our strategic investors, as a member of NSCC, to clear trades in listed cash equity securities routed by BATS Trading to other markets for execution. We also rely on Bank of America Merrill Lynch and Citi, each an affiliate of one of our strategic investors, to route certain orders that are not routed directly by BATS Trading in U.S. listed equity options for execution on other exchanges. For orders in U.S. listed equity options that BATS Trading directly routes to other exchanges, we rely on Bank of America Merrill Lynch and Citi, as clearing members of the OCC, to act as BATS Trading’s clearing firm on such orders.

Financial or other problems experienced by third parties could have an adverse effect on our business.

We are exposed to credit risk from third parties, including customers, clearing agents and counterparties. For example, we are exposed to credit risk for transaction fees we bill to customers on a monthly basis in arrears. Our customers and other third parties may default on their obligations to us due to lack of liquidity, operational failure, bankruptcy or other reasons.

In addition, with respect to orders BATS Trading routes to other markets for execution on behalf of our customers, BATS Trading is exposed to some counterparty credit risk in the case of a failure on the part of our clearing firm, Wedbush Securities, until a trade settles (generally three days after the trade date). BATS Trading is also exposed to some counterparty credit risk in the case of a failure of a counterparty to a trade. Similarly, with respect to orders in U.S. listed equity options, we route orders for execution to other national securities exchanges through either BATS Trading or through affiliates of Bank of America Merrill Lynch and Citi, as discussed above. For orders in U.S. listed equity options routed through Bank of America Merrill Lynch or Citi and executed on another national securities exchange, BATS Trading has counterparty credit risk exposure to Bank of America Merrill Lynch or Citi until a trade settles (generally one day after the trade date). For orders in U.S. listed equity options routed directly by BATS Trading to, and executed on, another national securities exchange, BATS Trading also has counterparty credit exposure to Bank of America Merrill Lynch, which acts as BATS Trading’s options clearing firm on such transactions.

Our exposure to credit risk may be further impacted by volatile securities markets that may affect the ability of our customers and other third parties to satisfy their contractual obligations to us. Moreover, we may not be successful in managing our credit risk through reporting and control procedures or by maintaining credit standards. Any losses arising from such defaults or other credit losses could adversely affect our financial condition and operating results.

We may be required to assume ownership of a position in securities in connection with our order routing service, which could subject us to trading losses when we dispose of that position.

We offer a smart-order routing service through our broker-dealer subsidiary, BATS Trading, which provides our customers with access to other market centers when we route their orders to those market centers for execution. In connection with this service, however, we may assume ownership of a position in securities. This may occur, for example, when a market center to which we have routed a customer’s order experiences systems problems and is unable to determine the status of that order. When this happens, we may make a business decision to provide a cancellation notice to our customer, relieving our customer of any liability with respect to the order. We may be informed later, however, that the order was executed at the market center to which we routed it, in which case BATS Trading would be required to take ownership of that securities position. Our

 

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clearing broker, Wedbush Securities, maintains an error account on behalf of BATS Trading into which such positions settle, and we require Wedbush Securities to trade out of those positions as expeditiously as possible, which could result in our incurring trading losses.

Current economic conditions could adversely affect our business and financial condition.

Our business performance is impacted by a number of factors including general economic conditions and other factors that are generally beyond our control. Although market conditions have improved recently, a long-term continuation of challenging economic conditions is likely to negatively impact our business. Poor economic conditions may result in a decline in trading volume and a reduction in the demand for our products and could affect the ability of our customers to meet their obligations to us.

Trading volume is directly affected by economic, political and market conditions, broad trends in business and finance, unforeseen market closures or other disruptions in trading, the level and volatility of interest rates, inflation, changes in price levels of securities and the overall level of investor confidence. In recent years, trading volumes across our markets have fluctuated significantly depending on market conditions and other factors beyond our control. In addition, trading volume in a particular stock could be negatively impacted by a significant reverse stock split which materially reduces the number of shares of such stock in the market. It is not possible to accurately forecast volatility or trading volumes. Because a significant percentage of our revenue is tied directly to the volume of securities traded on our markets, it is possible that a general decline in trading volumes could lower revenues and may adversely affect our operating results if we are unable to offset falling volumes through increased market share. In particular, volume for our U.S. Equities segment decreased in 2010 from 2009 as a result of the uncertain economic climate, reduced volumes and decreased volatility.

In Europe, countries such as Portugal, Ireland, Greece and Spain have been particularly affected by the recent financial and economic conditions. The European Union, the European Central Bank and the International Monetary Fund have prepared rescue packages for some of the affected countries. We cannot predict with any certainty whether these packages or other rescue plans will be successful or the effect that they may have on our business, results of operations, cash flows and financial condition.

Fluctuations in our quarterly operating results may negatively affect the market price of our Class A common stock.

Our business experiences seasonal fluctuations, reflecting reduced trading activity generally during the third quarter of each year and during the last month of the year. In addition, the financial services industry is risky and unpredictable and is directly affected by many national and international factors beyond our control, including:

 

   

economic, political and geopolitical market conditions;

 

   

natural disasters, terrorism, war or other catastrophes;

 

   

broad trends in industry and finance;

 

   

changes in price levels and volatility in the stock markets;

 

   

the level and volatility of interest rates;

 

   

changes in government monetary or tax policy;

 

   

other legislative and regulatory changes;

 

   

the perceived attractiveness of the U.S. or European capital markets; and

 

   

inflation.

Any one of these factors could have a material adverse effect on our business, financial condition and operating results by causing a substantial decline in the financial services markets and reducing trading volumes. As a result, it is possible that our operating results or other operating metrics may fail to meet the expectations of stock market analysts and investors. If this happens, the market price of our Class A common stock may be adversely affected.

 

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System limitations, failures or security breaches could harm our business.

Our business depends on the integrity and performance of our computer and communications systems. If our systems cannot expand to cope with increased demand or otherwise fail to perform, we could experience unanticipated disruptions in service, slower response times and delays in the introduction of new products and services. These consequences could result in trading outages, lower trading volumes, financial losses, decreased customer service and satisfaction and regulatory sanctions. Our markets have experienced occasional systems failures and delays in the past and could experience future systems failures and delays.

Our systems and operations also are vulnerable to damage or interruption from human error, natural disasters, power loss, sabotage or terrorism, computer viruses, unauthorized access, intentional acts of vandalism and similar events. Persons who circumvent security measures could wrongfully access and use our information or our customers’ information or cause interruptions or malfunctions in our operations. Although we currently maintain and expect to maintain security measures designed to protect the integrity of our systems, multiple computer facilities designed to provide redundancy and back-up to reduce the risk of system disruptions and facilities expected to maintain service during a system disruption, such security measures, systems and facilities may prove inadequate. Any breach in security or system failure that allows unauthorized access, causes an interruption in service or decreases the responsiveness of our systems could impair our reputation, damage our brand name and negatively impact our business, financial condition and operating results.

The occurrence or perception of unauthorized disclosure of confidential information could harm our business.

In the course of our business, we receive, process, transmit and store confidential information. Our treatment of such information is subject to contractual restrictions. While we take measures to protect against unauthorized access to such information, these measures may be inadequate, and any failure on our part to protect this information may subject us to contractual liability and damages, loss of business, penalties and unfavorable publicity. Even the mere perception of a security breach or inadvertent disclosure of confidential information could harm our reputation. The occurrence of any of these events could have an adverse effect on our business.

Our inability to protect our intellectual property rights and claims by others that we infringe their intellectual property rights could adversely affect our business.

To protect our intellectual property rights, we rely on a combination of trademark and copyright laws in the United States and similar laws in other countries, trade secret protection, confidentiality agreements and other contractual arrangements with our employees, customers and others. Despite these measures, any of our intellectual property rights could be challenged, invalidated, circumvented or misappropriated, and any application for registration of such rights could be denied. We may be unable to detect the unauthorized use of our proprietary information or take appropriate steps to enforce our intellectual property rights. Failure to protect our intellectual property adequately could harm our brand and affect our ability to compete effectively. Defending our intellectual property rights could result in the expenditure of significant financial and managerial resources, which could adversely affect our business, financial condition and operating results. Further, the laws of certain countries do not protect intellectual property rights to the same extent as the laws of the United States. Therefore, in certain jurisdictions, we may be unable to protect our intellectual property and proprietary technology adequately against unauthorized third-party copying or use, which could adversely affect our competitive position.

Although we have filed two patent applications in the United States, we do not anticipate relying upon patents as a primary means of protecting our rights in our intellectual property. In any event, there can be no assurance that our patent applications will be approved, that any issued patents will adequately protect our intellectual property, or that such patents will not be challenged by third parties.

 

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Finally, third parties may claim that we or customers indemnified by us are infringing upon their intellectual property rights. Even if we believe that such claims are without merit, they can be time-consuming and costly to defend and divert management resources and attention. Successful claims of intellectual property infringement also might require us to redesign infringing technology, enter into costly settlement or license agreements, pay costly damage awards or face a temporary or permanent injunction prohibiting us from using infringing technology. If we are found to be infringing and cannot, or do not, license the infringed technology on reasonable pricing terms or at all, or substitute similar technology from another source, our business, financial condition and results of operations could be adversely impacted.

We are currently a defendant in a patent infringement action brought by Realtime Data, LLC d/b/a IXO, which we refer to as Realtime. Realtime alleged in three complaints that we, along with certain other financial instrument exchanges, investment and commercial banking companies and financial data providers, infringed six Realtime patents by using, selling or offering for sale financial data compression products or services. The complaint seeks declaratory and injunctive relief or, in the alternative, a compulsory ongoing licensing fee, as well as unspecified damages for past and future infringement, attorneys’ fees, costs and expenses. Further, several of the defendant financial data providers are our members whom we have indemnified against any damages resulting from this action. While we believe the claims against us and such members are without merit and intend to vigorously defend this litigation, there can be no assurance that we will be successful, and any adverse outcome could adversely affect our business.

Our use of open source software code may subject our software to general release or require us to re-engineer our software, which could harm our business.

We have used open source software code to create our proprietary software for use in our business. Companies that incorporate open source software into their products have, from time to time, faced claims challenging the ownership of open source software. As a result, we could be subject to suits by parties claiming ownership of what we believe to be open source software. In addition, some open source software licenses require users who distribute open source software as part of their software to publicly disclose all or part of the source code in their software and make any derivative works of the open source code available on unfavorable terms or at no cost. Open source license terms may be ambiguous, and many of the risks associated with usage of open source software cannot be eliminated. We believe that our use of open source software is in compliance with the relevant open source software licenses and does not require disclosure of any of our source code. However, if we were found to have inappropriately used open source software, we may be required to release our proprietary source code, re-engineer or discontinue use of our software or take other remedial action.

We are subject to risks relating to litigation, potential securities law liability and other liability.

Many aspects of our business potentially involve substantial liability risks. Although we are immune from private suits for SRO activities, this immunity only covers certain of our activities in the United States, and we could be exposed to liability under national and local laws, court decisions and rules and regulations promulgated by regulatory agencies. Furthermore, in the United States, we are subject to oversight by the SEC. In the case of non-compliance with our obligations under the securities laws, we could be subject to investigation and judicial or administrative proceedings that may result in substantial penalties. Any such liability or penalties could have a material adverse effect on our business.

Our European business is subject to regulatory oversight in the United Kingdom by the FSA, which through the “passporting” process provides authorization to carry on business in other EEA member states. In addition, our operations are regulated at the European Union level. If a regulatory authority makes a finding of non-compliance, conditional fines could be imposed and our licenses could be revoked. Any such fine or revocation of a license could have a material adverse effect on our business.

 

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Failures in our compliance systems could subject us to significant legal and regulatory costs. Furthermore, if our risk management methods are not effective, our business, reputation and financial results may be adversely affected.

Our ability to comply with all applicable laws and rules is largely dependent on our establishment and maintenance of compliance, audit and reporting systems and procedures, as well as our ability to attract and retain qualified compliance, audit and risk management personnel. These systems and procedures may not be fully effective. We face the risk of intervention by regulatory authorities, including extensive examination and surveillance activity. In the case of actual or alleged non-compliance with regulations, we could be subject to investigations and judicial or administrative proceedings that may result in substantial penalties or civil lawsuits for damages, which can be substantial. In the past, the SEC has brought actions against exchange operators for failing to fulfill their obligations to have an effective regulatory system. Any failure to comply with applicable laws and rules could adversely affect our business, reputation, financial condition and operating results and, in extreme cases, our ability to conduct our business or portions thereof.

Additionally, we have adopted policies and procedures to identify, monitor and manage our risks. These policies and procedures, however, may not be fully effective. If our policies and procedures are not fully effective or we are not always successful in monitoring or evaluating the risks to which we are or may be exposed, our business, reputation, financial condition and operating results could be materially adversely affected.

In 2009, we identified a material weakness in our internal control over financial reporting which has now been remediated. Our business may be adversely affected if we fail to maintain effective controls over financial reporting in the future.

Our management is responsible for establishing and maintaining adequate internal control over financial reporting, a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements in accordance with U.S. GAAP.

In 2009, we identified material weaknesses in internal controls related to financial reporting and accounting for stock compensation. Remediation efforts to enhance our internal controls related to financial reporting and accounting for stock compensation have been completed. We have restated our 2009 consolidated financial statements, and the controls we implemented to address the material weaknesses were determined to be effective by our management as of December 31, 2010. We face the risk, however, that, notwithstanding our efforts to identify and remedy the material weakness in our internal control over financial reporting, we may discover other material weaknesses in the future. Failure to maintain an effective internal control environment could result in our not being able to accurately report our financial results, prevent or detect fraud or provide timely and reliable financial information pursuant to the reporting obligations we will have as a public company, which could have a material adverse effect on our business, financial condition and results of operations. Further, it could cause our investors to lose confidence in the financial information we report, which could adversely affect the price of our Class A common stock.

Damage to our reputation could have a material adverse effect on our business.

We believe one of our competitive strengths is our strong reputation. Various issues may give rise to reputational risk, including issues relating to:

 

   

the representation of our business in the media;

 

   

the quality of our products, including the reliability of our transaction-based business, and the accuracy of our market data;

 

   

the ability to execute our business plan, key initiatives or new business ventures and the ability to keep up with changing customer demands;

 

   

the accuracy of our financial statements and other financial and statistical information;

 

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the quality of our corporate governance structure;

 

   

the quality of our disclosure controls or internal controls over financial reporting, including any failures in supervision;

 

   

security breaches, including any unauthorized delivery of proprietary data to third parties;

 

   

management of our outsourcing relationships, including our relationship with FINRA; and

 

   

any misconduct or fraudulent activity by our employees or other persons formerly or currently associated with us.

Damage to our reputation could cause a reduction in the trading volume on our exchanges or cause us to lose customers. This, in turn, may have a material adverse effect on our business, financial condition and operating results.

Because we have operations in Europe, we are exposed to currency risk.

We have operations in the United States, the United Kingdom and continental Europe, and with our pending acquisition of Chi-X Europe, we will significantly increase our presence in Europe. We therefore have significant exposure to exchange rate movements between the British pound, the Euro and the U.S. dollar, and upon the completion of the Chi-X Europe acquisition, this currency risk exposure is expected to increase. Significant inflation or changes in foreign exchange rates with respect to one or more of these currencies could occur as a result of general economic conditions, acts of war or terrorism, changes in governmental monetary or tax policy or changes in local interest rates. These exchange rate differences will affect the translation of our non-U.S. results of operations and financial condition into U.S. dollars as part of our consolidated financial statements.

The requirements of being a public company may strain our resources, divert management’s attention and affect our ability to attract and retain qualified board members.

As a public company, we will be subject to the reporting requirements of the Exchange Act, the Sarbanes-Oxley Act of 2002, which we refer to as the Sarbanes-Oxley Act, and BZX listing requirements. The requirements of these rules and regulations will increase our legal and financial compliance costs, make some activities more difficult, time-consuming or costly and may also place undue strain on our systems and resources. The Exchange Act requires, among other things, that we file annual, quarterly and current reports with respect to our business and financial condition. The Sarbanes-Oxley Act requires, among other things, that we maintain effective disclosure controls and procedures and internal controls for financial reporting. Our management will be required to report on the effectiveness of our internal control over financial reporting and our independent registered public accounting firm will be required to attest to such internal control over financial reporting. In order to maintain and improve the effectiveness of our disclosure controls and procedures and internal control over financial reporting, significant resources and management oversight will be required. As a result, management’s attention may be diverted from other business concerns, which could have a material adverse effect on our business, financial condition and results of operations.

These rules and regulations could also make it more difficult for us to attract and retain qualified independent members of our board of directors. Additionally, we expect these rules and regulations to make it more difficult and more expensive for us to obtain director and officer liability insurance. We may be required to accept reduced coverage or incur substantially higher costs to obtain coverage.

Risks Relating to an Investment in Our Class A Common Stock

Volatility in our stock price could adversely affect your investment in our Class A common stock.

There has not been a public market for our Class A common stock prior to this offering. We cannot predict the extent to which a trading market for our Class A common stock will develop or how liquid that market might become. If you purchase shares of Class A common stock in this offering, you will pay a price that was not

 

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established in the public trading markets. The initial public offering price will be determined by negotiations between us, the underwriters and the selling stockholders. You may not be able to resell your shares above the initial public offering price and may suffer a loss on your investment.

Broad market and industry factors may adversely affect the market price of our Class A common stock, regardless of our actual operating performance. Factors that could cause fluctuations in our stock price may include, among other things:

 

   

actual or anticipated variations in quarterly operating results;

 

   

changes in financial estimates by us or by any securities analysts who might cover our stock;

 

   

conditions or trends in our industry, including trading volumes, regulatory changes or changes in the securities marketplace;

 

   

changes in the market valuations of other companies operating in our industry;

 

   

announcements by us or our competitors of significant acquisitions, strategic partnerships or divestitures;

 

   

announcements of investigations or regulatory scrutiny of our operations or lawsuits filed against us;

 

   

additions or departures of key personnel; and

 

   

sales of our Class A common stock, including sales of our Class A common stock by our directors and officers, our strategic investors or the estate of Lehman Brothers Holdings Inc., including upon conversion of any Class B common stock, Non-Voting Class A common stock or Non-Voting Class B common stock following the expiration of the applicable transfer restrictions or the occurrence of other limited circumstances.

We will be controlled by our strategic investors, whose interests may differ from those of other stockholders.

Upon completion of this offering, our strategic investors will collectively own approximately             shares of our Class A common stock and              shares of Class B common stock, representing approximately     % of the total voting power of our outstanding capital stock. See “Principal and Selling Stockholders.” We are not a party to any voting agreement with any of our stockholders, other than the Investor Rights Agreement dated as of May 13, 2010 among us and our stockholders (which, pursuant to its terms, will terminate upon consummation of this offering except for the registration rights contained therein), which we refer to as the Investor Rights Agreement, and we are not aware of any other voting agreements among our strategic investors; however, they may enter into voting agreements in the future or otherwise vote in a similar manner. To the extent that all of these strategic investors vote similarly, they will be able, by virtue of their ability to elect our board of directors, to control our policies and operations, including the determination of our strategic plans, appointment of management, future issuances of our common stock or other securities, the payments of dividends on our common stock, entering into extraordinary transactions and the approval of major financing decisions, and their interests may not in all cases be aligned with your interests. This concentrated control will limit your ability to influence corporate matters. As a result, the market price of our Class A common stock could be adversely affected.

Affiliates of our strategic investors are also significant customers. See “Certain Relationships and Related Transactions.” As a result, the interests of these investors could conflict with your interests as holders of our Class A common stock in a number of ways. For example:

 

   

you may disagree with the structure and timing of future transfers by these stockholders of all or any portion of their ownership interests in us. The actual or potential sale by these stockholders of their holdings of our Class A common stock either directly or upon conversion of Non-Voting Class A common stock, Class B common stock or Non-Voting Class B common stock held by them could cause the market price of our stock to decline significantly;

 

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these stockholders may have or acquire an ownership interest in competing businesses (including national securities exchanges, MTFs or ECNs) and they may make decisions that favor the competing enterprise over our company; and

 

   

many of these stockholders, as affiliates of our customers, have an incentive to favor commercial terms that may not be advantageous to us, such as lower “taker fees” and higher “maker” rebates on BZX.

Accordingly, our strategic investors may have different business objectives, any of which could adversely impact the market value of your shares of Class A common stock.

Certain affiliates of the underwriters of this offering are also selling stockholders and, therefore, have interests in this offering beyond customary underwriting discounts and commissions.

Certain affiliates of the underwriters of this offering are participating as selling stockholders in this offering. There may be a conflict of interest between their interests as selling stockholders (for example, to maximize the value of their investment) and their respective interests as underwriters (for example, in negotiating the initial public offering price) as well as your interest as a purchaser. As participants in this offering that are seeking to realize the value of their investment in us, these underwriters have interests beyond customary underwriting discounts and commissions.

If securities or industry analysts do not publish research or reports about us, or if they adversely change their recommendations regarding our Class A common stock, then our stock price and trading volume could decline.

The trading market for our Class A common stock will be influenced by the research and reports that industry or securities analysts publish about us, our industry and our markets. If no analyst elects to cover us and publish research or reports about us, the market for our Class A common stock could be severely limited, and our stock price could be adversely affected. In addition, if one or more analysts ceases coverage of us or fails to regularly publish reports on us, we could lose visibility in the financial markets, which in turn could cause our stock price or trading volume to decline. If one or more analysts who elect to cover us adversely changes their recommendations regarding our Class A common stock, our stock price could decline. In addition, SEC rules may make it impractical for analysts associated with some of our strategic investors to cover us.

Our share price may decline due to the large number of shares eligible for future sale.

Sales of substantial amounts of our Class A common stock, or the possibility of such sales, may adversely affect the market price of our Class A common stock. These sales may also make it more difficult for us to raise capital through the issuance of equity securities at a time and at a price we deem appropriate. See “Shares Eligible for Future Sale” for a discussion of possible future sales of Class A common stock.

Upon completion of this offering, there will be              shares of Class A common stock,              shares of Non-Voting Class A common stock,              shares of Class B common stock and              shares of Non-Voting Class B common stock outstanding. Each share of Class B common stock and Non-Voting Class B common stock will automatically convert into one share of Class A common stock in connection with any transfer, whether or not for value, following the expiration of the three-year restriction on transfer, except for certain transfers described in “Description of Capital Stock—Common Stock—Conversion.” Each share of Non-Voting Class A common stock will automatically convert into one share of Class A common stock in connection with any transfer to anyone other than a “related person” (as defined under “Description of Capital Stock—Ownership and Voting Limits on Our Common Stock”) of the holder, whether or not for value, following the expiration of the one-year restriction on transfer. Of these shares,             will be freely transferable without restriction or further registration under the Securities Act of 1933, as amended, which we refer to as the Securities Act, after one year. See “Shares Eligible for Future Sale.”

 

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In addition to outstanding shares eligible for sale, approximately              million shares of our Class A common stock will be issuable upon consummation of this offering under currently outstanding stock options granted to several executive officers and employees under our incentive plans. Such shares of Class A common stock will also be subject to a transfer restriction that expires one year from the completion of this offering.

Additionally, the Investor Rights Agreement provides for certain registration rights, including demand registration rights. For a more detailed description of these registration rights, see “Description of Capital Stock—Registration Rights.”

Upon completion of this offering, our strategic investors will collectively own approximately              shares of our class A common stock and              shares of Class B common stock, representing approximately     % of the total voting power of our outstanding capital stock. See “Principal and Selling Stockholders.”

Your ownership of our company may be diluted if additional capital stock is issued to raise capital, to finance acquisitions, in connection with strategic transactions or pursuant to stock options or other equity compensation awards.

We may seek to raise additional funds, finance acquisitions or develop strategic relationships by issuing equity or convertible debt securities, which would reduce the percentage ownership of existing stockholders. In addition, as of March 31, 2011,              shares of Class A common stock were issuable upon the exercise of outstanding stock options, and an aggregate of             shares of Class A common stock were reserved for future issuance under our stock option plans. Following this offering, our board of directors will have the authority, without action or vote of the stockholders, to issue all or any part of our authorized but unissued shares of preferred stock or Class A common stock (except shares of Class A common stock reserved for issuance upon conversion of our Non-Voting Class A common stock, Class B common stock or Non-Voting Class B common stock), including pursuant to stock options or other equity compensation awards. Following our reclassification and              -for-              stock split, shares of preferred stock and              shares of Class A common stock will be authorized and unissued under our amended and restated certificate of incorporation. Future issuances of preferred stock or Class A common stock would reduce your influence over matters on which stockholders vote and would be dilutive to earnings per share. In addition, any newly issued preferred stock could have rights, preferences and privileges senior to those of our common stock. Those rights, preferences and privileges could include, among other things, the establishment of dividends that must be paid prior to declaring or paying dividends or other distributions to holders of our common stock, greater or preferential liquidation rights, which could negatively affect the rights of holders of our common stock and the right to convert such preferred stock into shares of our Class A common stock at a rate or price which would have a dilutive effect on the outstanding shares of our common stock.

Provisions in our amended and restated certificate of incorporation and bylaws and Delaware law might discourage, delay or prevent a change of control of our company or changes in our management and, therefore, depress the trading price of our Class A common stock.

Our organizational documents contain provisions that may have the effect of discouraging or delaying a change in control of us or unsolicited acquisition proposals that a stockholder might consider favorable. These provisions generally include:

 

   

the dual class common stock structure of our voting stock. As a result of this structure our strategic investors have significant influence over all matters requiring stockholder approval, including the election of directors and significant corporate transactions, such as a merger or other sale of our company or its assets. This concentrated control could discourage others from initiating any potential merger, takeover or other change of control transaction that other stockholders may view as beneficial;

 

   

voting and ownership limitations. Our amended and restated certificate of incorporation prohibits any person from owning greater than 40% of any class of our capital stock, prohibits exchange members

 

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from owning greater than 20% of any class of our capital stock and prohibits all persons from exercising a greater than 20% voting power of our issued and outstanding capital stock, in each case subject to certain conditions and exceptions;

 

   

advance notice requirements for stockholder proposals and director nominations;

 

   

the inability of stockholders to call special meetings;

 

   

the ability of our board of directors to make, alter or repeal our bylaws; and

 

   

the ability of our board of directors to designate the terms of and issue new series of preferred stock without stockholder approval. Any series of preferred stock is likely to be senior to our Class A common stock with respect to dividends, liquidation rights and, possibly, voting rights.

Moreover, once holders of Class B common stock have less than 50% of the voting power of our issued and outstanding capital stock, (i) stockholders will not be permitted to act by written consent, (ii) supermajority voting requirements for amendment of our governing documents will become effective and (iii) the “business combination” provisions of Section 203 of the General Corporation Law of the State of Delaware, or the DGCL, will apply to us. Section 203 prohibits a person who acquires more than 15% but less than 85% of all classes of our outstanding voting stock without the approval of our board of directors from merging or combining with us for a period of three years, unless the merger or combination is approved by a two-thirds vote of the shares not owned by such person. These provisions would apply even if the proposed merger or acquisition could be considered beneficial by some stockholders.

The existence of the foregoing provisions and anti-takeover measures could limit the price that investors might be willing to pay in the future for shares of our Class A common stock. They could also deter potential acquirers of our company, thereby reducing the likelihood that you could receive a premium for your Class A common stock in an acquisition. See “Description of Capital Stock—Certain Provisions in Our Amended and Restated Certificate of Incorporation and Bylaws” for a discussion of these provisions.

We do not currently intend to pay dividends on our common stock.

We do not currently intend to pay dividends on our common stock. We plan to retain any earnings for use in the operation of our business and to fund future growth. Any future determination to pay dividends will be at the discretion of our board of directors.

 

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SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS

We have made statements under the captions “Prospectus Summary,” “Risk Factors,” “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” “Business” and in other sections of this prospectus that are forward-looking statements. In some cases, you can identify these statements by forward-looking words such as “may,” “might,” “will,” “should,” “expects,” “plans,” “anticipates,” “could,” “believes,” “estimates,” “predicts,” “potential” or “continue,” the negative of these terms and other comparable terminology. These forward-looking statements, which are subject to risks, uncertainties and assumptions about us, may include projections of our future financial performance, our anticipated growth strategies and anticipated trends in our business. These statements are only predictions based on our current expectations and projections about future events. There are important factors that could cause our actual results, level of activity, performance or achievements to differ materially from the results, level of activity, performance or achievements expressed or implied by the forward-looking statements, including those factors discussed under the caption entitled “Risk Factors.” You should specifically consider the numerous risks outlined under “Risk Factors.”

Although we believe the expectations reflected in the forward-looking statements are reasonable, we cannot guarantee future results, level of activity, performance or achievements. Moreover, neither we nor any other person assumes responsibility for the accuracy and completeness of any of these forward-looking statements. We are under no duty to update any of these forward-looking statements after the date of this prospectus to conform our prior statements to actual results or revised expectations.

 

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CHI-X EUROPE ACQUISITION

Acquisition Agreement

On February 18, 2011, we entered into a definitive agreement to acquire Chi-X Europe pursuant to which Chi-X Europe’s shareholders will receive, in the aggregate, approximately 4.4 million newly issued shares of our common stock and approximately $36 million in cash. In addition, pursuant to the acquisition agreement, a contingent cash payment of $30 million or $65 million may be due to Chi-X Europe’s shareholders in the third quarter of 2012 if one of the following market-share benchmarks is met in the period from January 1, 2012 to June 30, 2012: 1) a benchmark market share (calculated as our combined company’s matched market share in all of the securities included in 21 European indices plus certain additional securities set forth in the acquisition agreement) of at least 22% but less than 25% (which would result in a $30 million payment) or 2) a benchmark market share of 25% or more (which would result in a $65 million payment). For the first quarter of 2011, we had approximately 6.4% of such benchmark market share, and Chi-X Europe had approximately 17.3%. We expect the transaction to close, subject to antitrust clearance in the United Kingdom, during the second quarter of 2011.

Upon the completion of the acquisition, Chi-X Europe’s assets, liabilities and operations, including amortization and depreciation expenses, will be reported under our European Equities segment. As a result of the acquisition, we will have goodwill of approximately $149.1 million that will be assessed for impairment under ASC 350—Intangibles—Goodwill and Other. We also expect to have approximately $99.4 million in identifiable intangible assets, which will result in approximately $3 million to $4 million in amortization expense in 2011. In addition, we expect to record the fair value of the liability for the contingent consideration of up to $65 million to be paid to the former owners of Chi-X Europe discussed above if certain criteria are met by June 2012. The fair value of the liability for the contingent consideration will be reassessed each reporting period, and any change in the liability will be recorded in our results of operations. We expect to incur one-time acquisition related costs of approximately $8 million to $10 million in 2011.

Strategic Rationale

We believe that our combination with Chi-X Europe will further our position as a leading transatlantic exchange operator and will solidify us as a preeminent pan-European trading venue. We expect to benefit from synergies as a result of the acquisition, including the transition of Chi-X Europe to our trading platform, which we expect to be completed during the fourth quarter of 2011. We believe the combination will improve our competitive position, enhance our profitability through scale and cost efficiencies and provide us additional opportunities to influence European market structure developments for the benefit of our customers.

Overview of Chi-X Europe

Chi-X Europe is headquartered in London. For the first quarter of 2011, it operated the largest pan-European MTF with a 17.0% share of European trading in the securities available for trading on Chi-X Europe. Chi-X Europe currently offers trading in listed cash equity securities within 25 indices across 15 national European markets, as well as ETFs, exchange-traded commodities and international depositary receipts, through two order books operated on a single platform. Chi-X Europe’s order books include a visible order book similar to BATS Europe and Chi-Delta, a stand-alone order book for non-displayed order matching or “dark pool,” which meets the needs of customers who wish to minimize the market impact of their orders. In March 2011, Chi-X Europe announced that it had created an alliance with Russell Investments to launch a new series of European indices. The new series will be constructed using Russell Investments’ index methodology and Chi-X Europe’s transaction prices as the primary underlying data source. Chi-X Europe intends to list futures and options contracts on the indices in the future as well as encourage the issuance of ETFs based upon the indices.

 

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UNAUDITED SELECTED PRO FORMA FINANCIAL DATA

The following unaudited selected pro forma financial data and explanatory notes are intended to provide information about how the Chi-X Europe acquisition might have affected our historical consolidated statement of operations if it had been consummated as of January 1, 2010 and our statement of financial condition if it had been consummated as of December 31, 2010. The following unaudited pro forma condensed financial data are provided for informational purposes only and do not necessarily reflect our results of operations or financial position had the acquisition occurred as of the date indicated, nor should they be taken as necessarily indicative of our future results of operation or financial position. The following unaudited pro forma condensed financial data should be read in conjunction with “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and our consolidated financial statements and the accompanying notes included elsewhere in this prospectus.

Unaudited Pro Forma Condensed Combined Statement of Operations

For the Year Ended December 31, 2010 (under U.S. GAAP)

 

     BATS Global
Markets, Inc.
(Historical)
    Chi-X Europe
Limited
(Historical)(1)
     Pro Forma
Adjustments(2)
    BATS Global
Markets, Inc.
Pro Forma
 
     (in millions, except share and per share data)  

Revenues:

         

Transaction fees

   $ 668.3      $ 65.1       $ —        $ 733.4   

Market data fees

     46.0        —           —          46.0   

Regulatory transaction fees(3)

     111.0        —           —          111.0   

Other

     9.5        —           —          9.5   
                                 

Total revenues

     834.8        65.1         —          899.9   

Cost of revenues:

         

Liquidity payments

     541.7        40.5         —          582.2   

Routing and clearing

     82.2        —           —          82.2   

Section 31 fees(3)

     111.0        —           —          111.0   

Other

     0.7        —           —          0.7   
                                 

Total cost of revenues

     735.6        40.5         —          776.1   
                                 

Revenues less cost of revenues

     99.2        24.6         —          123.8   

Operating expenses:

         

Compensation and benefits

     30.6        13.1         2.8 (4)      46.5   

Depreciation and amortization

     6.5        1.4         7.9 (5)      15.8   

General and administrative

     27.3        9.2         6.2 (4)      42.7   
                                 

Total operating expenses

     64.4        23.7         16.9        105.0   
                                 

Operating income (loss)

     34.8        0.9         (16.9     18.8   

Interest and investment income

     0.3        0.3         (0.1 )(6)      0.5   

Other expense

     (0.1     —           —          (0.1
                                 

Income (loss) before income tax provision

     35.0        1.2         (17.0     19.2   

Income tax provision (benefit)

     15.2        —           (7.4 )(7)      7.8   
                                 

Net income (loss)

   $ 19.8      $ 1.2       $ (9.6   $ 11.4   
                                 

Basic earnings per share

   $ 1.11           *      $ 0.51   

Diluted earnings per share

   $ 1.08           *      $ 0.50   

Basic weighted average shares outstanding

     17,814,233           4,366,748 (8)      22,180,981   

Diluted weighted average shares outstanding

     18,303,412           4,366,748 (8)      22,670,160   

 

* Not meaningful.

See footnotes under “Unaudited Pro Forma Condensed Combined Statement of Financial Condition For the Year Ended December 31, 2010 (under U.S. GAAP)” below.

 

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Unaudited Pro Forma Condensed Combined Statement of Financial Condition

As of December 31, 2010 (under U.S. GAAP)

 

     BATS Global
Markets, Inc.
(Historical)
    Chi-X Europe
Limited
(Historical)(1)
    Pro Forma
Adjustments(9)
    BATS Global
Markets, Inc.
Pro Forma
 
     (in millions)  

Assets:

        

Current assets:

        

Cash and cash equivalents

   $ 150.0      $ 56.3      $ (35.9 )(10)    $ 170.4   

Financial investments, at fair value

     27.3        —          —          27.3   

Receivables, net

     56.4        2.8        —          59.2   

Prepaid expenses

     2.0        0.6        —          2.6   
                                

Total current assets

     235.7        59.7        (35.9     259.5   

Property and equipment, net

     12.8        5.6        —          18.4   

Goodwill

     —          —          149.1 (10)      149.1   

Acquired intangible assets, net

     —          —          99.4 (10)      99.4   

Notes receivable

     1.0        —          —          1.0   

Deferred income taxes, net

     6.5        —          —          6.5   

Other assets

     0.5        0.3        —          0.8   
                                

Total assets

   $ 256.5      $ 65.6      $ 212.6      $ 534.7   
                                

Liabilities and stockholders’ equity:

        

Current liabilities:

        

Accounts payable and accrued expenses

   $ 22.8      $ 8.0      $ —        $ 30.8   

Section 31 fees payable

     33.7        —          —          33.7   

Deferred income taxes

     0.3        —          —          0.3   
                                

Total current liabilities

     56.8        8.0        —          64.8   

Deferred rent

     1.0        0.2        —          1.2   

Provisions and contingent liabilities

     —          0.5        45.6 (10)      46.1   

Stockholders’ equity:

        

Common stock, $0.01 par value, and additional paid-in capital

     176.0        79.2        144.7 (10)(11)      399.9   

Retained earnings (deficit)

     28.4        (22.3     22.3 (11)      28.4   

Other stockholders’ equity

     (5.7     —          —          (5.7
                                

Total stockholders’ equity

     198.7        56.9        167.0        422.6   
                                

Total liabilities and stockholders’ equity

   $ 256.5      $ 65.6      $ 212.6      $ 534.7   
                                

 

(1) 

Reflects the historical results of operations and financial condition of Chi-X Europe reconciled to U.S. GAAP from International Financial Reporting Standards, or IFRS, and converted from British pounds to U.S. dollars. See “Statement of Operations—Reconciliation from International Financial Reporting Standards to U.S. GAAP and Conversion from British Pound to U.S. Dollar For the Year Ended December 31, 2010” and “Statement of Financial Condition—Reconciliation from International Financial Reporting Standards to U.S. GAAP and Conversion from British Pounds to U.S. Dollars As of December 31, 2010” tables below. The Chi-X Europe audited financial statements and related notes are included elsewhere in this prospectus.

(2) 

Represents the effects of the acquisition of Chi-X Europe as if the acquisition had occurred on January 1, 2010.

(3) 

As national securities exchanges, BZX and BYX are assessed fees pursuant to Section 31 of the Exchange Act. Section 31 fees are assessed on the notional value traded and are designed to recover the costs to the government of supervision and regulation of securities markets and securities professionals. Section 31 fees are paid directly to the SEC, and our national securities exchanges then pass these costs along to our members as regulatory transaction fees, recognizing these amounts as incurred in cost of revenues and revenues, respectively.

(4) 

Represents non-recurring, transaction-related expenses, including severance, retention bonuses and professional fees.

 

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(5) 

Represents annual amortization of identifiable intangible assets as a result of the purchase of Chi-X Europe. Amortization of identifiable intangible assets is based on the discounted cash flow method applied over the respective useful lives of the assets. See Note 10 below.

(6) 

Eliminates interest income earned on cash used in the acquisition of Chi-X Europe.

(7) 

Represents the tax benefit of the amortization of intangible assets acquired and transaction-related expenses.

(8) 

Represents the common stock issued in the acquisition of Chi-X Europe. See Note 10 below.

(9) 

Represents the effects of the acquisition of Chi-X Europe as if the acquisition had occurred on December 31, 2010.

(10) 

The following table summarizes the consideration to be paid for Chi-X Europe:

 

     Consideration
(in millions)
 

Cash paid at closing

   $ 35.9   

4,366,748 shares of our common stock

     223.9 (a) 

Estimated value of contingent cash payment

     45.6   
        

Total consideration to Chi-X Europe shareholders

   $ 305.4   
        
  (a) Based on a third-party valuation as of May 6, 2011 and subject to change at time of close.

Under the purchase method of accounting, the total purchase price for the Chi-X Europe acquisition is allocated to acquired tangible and intangible assets based on preliminary estimates of their respective fair values upon the completion of the acquisition as determined by us and a third-party valuation firm. The preliminary allocation of the purchase price and the estimated useful life of the acquired intangible assets is as follows:

 

     Purchase Price
Allocation

(in millions)
    Estimated
Useful Life

(in years)
 

Customer list

   $ 78.7        20   

Trade name

     0.9        2   

Strategic alliance agreement

     1.6        5   

FSA registration

     18.2        Infinite   
          

Total acquired intangible assets

     99.4     

Goodwill

     149.1     
          

Total intangible assets

     248.5     

Current assets

     59.7     

Non-current assets

     0.3     

Fixed assets

     5.6     

Current liabilities

     (8.0  

Non-current liabilities

     (0.7  
          

Total cost of acquisition

   $ 305.4     
          

Of the total purchase price, $56.9 million has been allocated to net tangible assets and working capital acquired, and approximately $81.2 million has been allocated to amortizable intangible assets acquired. The amortization related to the amortizable intangible assets is reflected as a pro forma adjustment to the unaudited pro forma condensed combined consolidated statements of income. See Note 7 above.

Of the total estimated purchase price, approximately $149.1 million has been allocated to goodwill. Goodwill represents the excess of the purchase price of an acquired business over the fair value of the underlying net tangible and intangible assets.

In accordance with FASB Accounting Standards Codification 350—Intangibles—Goodwill and Other, goodwill is not amortized but instead is tested for impairment on an annual basis and whenever events or circumstances dictate. In the event that we determine that the value of goodwill has become impaired, we will incur an accounting charge for the amount of impairment during the fiscal quarter in which the determination is made.

 

(11) 

Represents elimination of Chi-X Europe’s capital for consolidated reporting.

 

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Statement of Operations

Reconciliation from International Financial Reporting Standards to U.S. GAAP and

Conversion from British Pounds to U.S. Dollars

For the Year Ended December 31, 2010

 

     Chi-X Europe Limited (Historical)      British
Pound/U.S.
Dollar
Exchange
Rate(2)
     Chi-X
Europe
Limited

(Historical)
U.S. GAAP
(U.S.  Dollar)
 
     International
Financial
Reporting
Standards(1)
     U.S. GAAP
Adjustments
    U.S.  GAAP
(British
Pounds)
       
     (in millions)             (in millions)  

Revenues:

             

Transaction fees

   £ 42.1       £ —        £ 42.1         1.546       $ 65.1   
                                     

Total revenues

     42.1         —          42.1            65.1   

Cost of revenues:

             

Liquidity payments

     26.2         —          26.2         1.546         40.5   
                                     

Total cost of revenues

     26.2         —          26.2            40.5   
                                     

Revenues less cost of revenues

     15.9         —          15.9            24.6   

Operating Expenses:

             

Compensation and benefits

     8.5         —          8.5         1.546         13.1   

Depreciation and amortization

     0.8         0.1 (3)      0.9         1.546         1.4   

General and administrative

     6.0         (0.1 )(3)      5.9         1.546         9.2   
                                     

Total operating expenses

     15.3         —          15.3            23.7   
                                     

Operating income

     0.6         —          0.6         1.546         0.9   

Interest and investment income

     0.2         —          0.2         1.546         0.3   
                                     

Income before income tax provision

     0.8         —          0.8            1.2   
                                     

Net income

   £ 0.8       £ —        £ 0.8          $ 1.2   
                                     

 

See footnotes under “Statement of Financial Condition—Reconciliation from International Financial Reporting Standards to U.S. GAAP and Conversion from British Pounds to U.S. Dollars As of December 31, 2010” below.

 

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Statement of Financial Condition

Reconciliation from International Financial Reporting Standards to U.S. GAAP and

Conversion from British Pounds to U.S. Dollars

As of December 31, 2010

 

     Chi-X Europe Limited (Historical)     British
Pound/U.S.
Dollar
Exchange
Rate(5)
     Chi-X
Europe
Limited

(Historical)
U.S. GAAP
(U.S.  Dollar)
 
     International
Financial
Reporting
Standards(4)
    U.S. GAAP
Adjustments
    U.S. GAAP
(British
Pounds)
      
           (in millions)                  (in millions)  

Assets:

           

Current assets:

           

Cash and cash equivalents

   £ 36.4      £ —        £ 36.4        1.547       $ 56.3   

Receivables, net

     1.8        —          1.8        1.547         2.8   

Prepaid expenses

     0.4        —          0.4        1.547         0.6   
                                   

Total current assets

     38.6        —          38.6           59.7   

Property and equipment, net

     3.4        0.2 (3)      3.6        1.547         5.6   

Other assets

     0.2        —          0.2        1.547         0.3   
                                   

Total assets

   £ 42.2      £ 0.2      £ 42.4         $ 65.6   
                                   

Liabilities and stockholders’ equity:

           

Current liabilities:

           

Accounts payable and accrued expenses

   £ 5.2      £ —        £ 5.2        1.547       $ 8.0   
                                   

Total current liabilities

     5.2        —          5.2           8.0   

Deferred rent

     0.1        —          0.1        1.547         0.2   

Provisions, commitments and contingencies

     0.1        0.2 (3)      0.3        1.547         0.5   

Stockholders’ equity:

           

Common stock and additional paid-in capital

     51.2        —          51.2        1.547         79.2   

Retained deficit

     (14.4     —          (14.4     1.547         (22.3
                                   

Total stockholders’ equity

     36.8        —          36.8           56.9   
                                   

Total liabilities and stockholders’ equity

   £ 42.2      £ 0.2      £ 42.4         $ 65.6   
                                   

 

(1) 

Represents the results of operations of Chi-X Europe in accordance with IFRS. The Chi-X Europe audited financial statements and related notes are included elsewhere in this prospectus.

(2) 

Represents the average foreign exchange rate of the British pounds into U.S. dollars for the year ended December 31, 2010.

(3) 

Represents the U.S. GAAP adjustment to record the fair value of an asset retirement obligation relating to Chi-X Europe’s leased space expected to be incurred at the termination of the lease.

(4) 

Represents the historical financial condition of Chi-X Europe in accordance with IFRS. The Chi-X Europe audited financial statements and related notes are included elsewhere in this prospectus.

(5) 

Reflects the foreign exchange rate of British pounds into U.S. dollars as of December 31, 2010.

 

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RECLASSIFICATION AND STOCK SPLIT

In conjunction with this offering, we intend to amend and restate our certificate of incorporation to reclassify our common stock, par value $0.01 per share (which has been designated as Voting Common Stock in our certificate of incorporation), as Class A common stock, par value $0.01 per share, and Class B common stock, par value $0.01 per share. We also intend to reclassify our common stock, par value $0.01 per share (which has been designated as Non-Voting Common Stock in our certificate of incorporation), as Non-Voting Class A common stock, par value $0.01 per share, and Non-Voting Class B common stock, par value $0.01 per share.

Each share of our Voting Common Stock outstanding immediately prior to this offering will be converted into four shares of Class A common stock and one share of Class B common stock. Each share of our Non-Voting Common Stock outstanding immediately prior to this offering will be converted into four shares of Non-Voting Class A common stock and one share of Non-Voting Class B common stock. In addition, each outstanding option to purchase a share of our Voting Common Stock will be converted into an equivalent option to purchase five shares of our Class A common stock.

Immediately following the reclassification, if a stockholder together with such stockholder’s affiliates owns less than 2% of both the total number of outstanding shares of our common stock and the total voting power of all of our outstanding common stock, each share of Class B common stock or Non-Voting Class B common stock that, at such time, is held by such stockholder and such stockholder’s affiliates shall convert automatically to a share of Class A common stock or Non-Voting Class A common stock, respectively. Accordingly, only stockholders who together with their affiliates own 2% or more of either the total number of outstanding shares of our common stock or the total voting power of our outstanding securities will continue to hold Class B common stock or Non-Voting Class B common stock immediately following the reclassification.

The rights of the holders of Class A common stock, Non-Voting Class A common stock, Class B common stock and Non-Voting Class B common stock will be identical, except with respect to voting rights, transfer restrictions and conversion provisions. With respect to voting, each share of Class A common stock will be entitled to one vote per share, and each share of Class B common stock will be entitled to five votes per share. Non-Voting Class A common stock and Non-Voting Class B common stock will not be entitled to vote, except as required by applicable law. Class A common stock not sold in this offering and the Non-Voting Class A common stock will be subject to a restriction on transfer for one year from the completion of this offering, and the Class B common stock and Non-Voting Class B common stock will be subject to a three-year transfer restriction, subject to certain exceptions as described in “Description of Capital Stock—Common Stock—Transfer Restrictions.” The Class B common stock and Non-Voting Class B common stock will automatically convert into Class A common stock in connection with any transfer following the expiration of the three-year transfer restriction, subject to certain exceptions described in “Description of Capital Stock—Common Stock—Conversion.” The Non-Voting Class A common stock will automatically convert into Class A common stock in connection with any transfer to anyone other than a related person of the holder following the expiration of the one-year transfer restriction. See “Description of Capital Stock.”

Immediately following the stock reclassification described above, we intend to declare a              -for-              stock split of all outstanding Class A common stock, Class B common stock, Non-Voting Class A common stock and Non-Voting Class B common stock.

As of March 31, 2011, ten affiliates of our customers, whom we refer to as our strategic investors, will collectively own approximately              shares of our Class A common stock and approximately              shares of our Class B common stock, representing approximately     % of the total voting power of our outstanding capital stock. These strategic investors are affiliates of Bank of America Merrill Lynch, Citi, Credit Suisse, Deutsche Bank, GETCO, J.P. Morgan, Lime Brokerage, Morgan Stanley, Tradebot Systems and WEDBUSH. See “Principal and Selling Stockholders.”

 

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USE OF PROCEEDS

We estimate that our net proceeds from this offering will be approximately $             million, based on an assumed initial public offering price of $             per share, which is the mid-point of the price range set forth on the cover page of this prospectus, and after deducting underwriting discounts and commissions and estimated offering expenses payable by us of $             million. We intend to use the net proceeds received by us in connection with this offering for general corporate purposes.

We will not receive any proceeds from the sale of our Class  A common stock by the selling stockholders in this offering.

DIVIDEND POLICY

We do not currently intend to pay dividends on our common stock. We plan to retain any earnings for use in the operation of our business and to fund future growth. Any future determination to pay dividends will be at the discretion of our board of directors.

 

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CAPITALIZATION

The following table sets forth our cash and cash equivalents and capitalization as of December 31, 2010:

 

   

on an actual basis;

 

   

on a pro forma basis to reflect the Chi-X Europe acquisition and our reclassification and             -for-             stock split to be consummated in conjunction with this offering, as described under “Reclassification and Stock Split;” and

 

   

on a pro forma as adjusted basis to give effect to the foregoing and to give effect to the issuance and sale by us of              shares of our Class A common stock in this offering at an assumed initial offering price of $             per share, which is the mid-point of the price range set forth on the cover page of this prospectus, and the application of the net proceeds of the offering, after deducting estimated underwriting discounts and commissions and estimated offering expenses payable by us.

This table should be read in conjunction with “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and the consolidated financial statements and notes thereto appearing elsewhere in this prospectus.

 

     December 31, 2010  
     Actual     Pro  Forma(1)(2)      Pro Forma  As
Adjusted(3)(4)
 
           (unaudited)  
     (in millions, except share and per share data)  

Cash and cash equivalents

   $ 150.0      $                    $                
                         

Stockholders’ equity:

       

Common stock, $0.01 par value: 20,000,000 shares authorized, 17,914,333 shares issued and 17,836,213 shares outstanding, actual; no shares authorized, issued and outstanding on a pro forma and pro forma as adjusted basis

   $ 0.2      $         $     

Class A common stock, par value $0.01 per share: no shares authorized, issued and outstanding, actual;              shares authorized,              shares issued and outstanding on a pro forma and pro forma as adjusted basis

     —          

Non-Voting Class A common stock, par value $0.01 per share: no shares authorized, issued and outstanding, actual;              shares authorized, issued and              outstanding on a pro forma and pro forma as adjusted basis

     —          

Class B common stock, par value $0.01 per share: no shares authorized, issued and outstanding, actual;              shares authorized,              shares issued and outstanding on a pro forma and pro forma as adjusted basis

     —          

Non-Voting Class B common stock, par value $0.01 per share: no shares authorized, issued and outstanding, actual;              shares authorized, issued and              outstanding on a pro forma and pro forma as adjusted basis

     —          

Treasury stock, at cost: 78,120 shares, actual;              shares on a pro forma and pro forma as adjusted basis

     (3.5     

Additional paid-in capital

     175.7        

Accumulated income (deficit)

     28.4        

Accumulated other comprehensive (loss) gain

     (2.1     
                         

Total stockholders’ equity

     198.7        
                         

Total capitalization

   $ 198.7      $         $     
                         

 

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(1) 

In conjunction with this offering, we intend to reclassify each share of our common stock which has been designated as Voting Common Stock as four shares of Class A common stock and one share of Class B common stock and each share of our common stock which has been designated as Non-Voting Common Stock as four shares of Non-Voting Class A common stock and one share of Non-Voting Class B common stock. Each share of Class A common stock will be entitled to one vote per share, and each share of Class B common stock will be entitled to five votes per share. Non-Voting Class A common stock and Non-Voting Class B common stock will not be entitled to vote, except as required by applicable law. See “Reclassification and Stock Split.”

(2) 

In connection with the Chi-X Europe acquisition, we will issue an aggregate of approximately 4.4 million shares of our common stock, including Voting Common Stock and Non-Voting Common Stock.

(3) 

A $1.00 increase/(decrease) in the assumed initial public offering price of $             per share, which is the mid-point of the price range listed on the cover page of this prospectus, would increase/(decrease) the pro forma as adjusted amount of each of cash and cash equivalents, additional paid-in capital and total capitalization by approximately $             million, assuming that the number of shares offered by us, as set forth on the cover page of this prospectus, remains the same and after deducting underwriting discounts and commissions and estimated offering expenses payable by us.

(4) 

If the underwriters’ option to purchase an additional             shares of Class A common stock in this offering from             is exercised in full, the pro forma as adjusted amount of each of additional paid-in capital and total capitalization would increase by approximately $             million, and we would have             shares of our Class A common stock issued and outstanding.

The above table does not include:

 

   

            shares of Class A common stock issuable upon the exercise of outstanding stock options with a weighted average exercise price of $             per share; and

 

   

an aggregate of              additional shares of Class A common stock reserved for future issuance under our stock option plans as of December 31, 2010.

 

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DILUTION

Dilution is the amount by which the portion of the offering price paid by the purchasers of our Class A common stock in this offering exceeds the net tangible book value per share of our Class A common stock after the offering. Our pro forma net tangible book value (deficit) as of December 31, 2010 was $            , or $             per share of Class A common stock. Pro forma net tangible book value per share is determined by dividing our tangible net worth, total assets less total liabilities, by the aggregate number of shares of Class A common stock, Class B common stock, Non-Voting Class A common stock and Non-Voting Class B common stock outstanding. After giving effect to the sale by us of the                 shares of Class A common stock in this offering, at an assumed initial public offering price of $             per share of Class A common stock, the mid-point of the range set forth on the cover page of this prospectus, and the receipt and application of the net proceeds, our pro forma net tangible book value at December 31, 2010 would have been $             or $             per share. This represents an immediate increase in pro forma net tangible book value to existing stockholders of $             per share and an immediate dilution to new investors of $             per share. The following table illustrates this per share dilution:

 

Assumed initial public offering price

      $                

Pro forma net tangible book value (deficit) per share of Class A common stock as of December 31, 2010

   $                   

Increase in pro forma net tangible book value per share of Class A common stock attributable to new investors

     
           

Pro forma net tangible book value per share after offering

     
           

Dilution per share of Class A common stock to new investors

      $     
           

Dilution is determined by subtracting pro forma net tangible book value per share of Class A common stock and Class B common stock after the offering from the initial public offering price per share of Class A common stock.

The following table sets forth, on a pro forma basis, as of December 31, 2010, the number of shares of Class A common stock purchased from us, the total consideration paid, or to be paid, and the average price per share paid, or to be paid, by existing stockholders and by the new investors, at an assumed initial public offering price of $             per share of Class A common stock, the mid-point of the range set forth on the cover page of this prospectus, before deducting estimated underwriting discounts and commissions and offering expenses payable by us:

 

     Shares Purchased     Total Consideration     Average
Price
Per Share
 
      Number      Percent     Amount      Percent    

Existing stockholders

                   $                             $                

New investors

            
                                          

Total

        100   $           100   $     
                                          

Sales by the selling stockholders in this offering will reduce the number of shares of Class A common stock held by existing stockholders to             , or approximately     %, and will increase the number of shares of Class A common stock to be purchased by new investors to             , or approximately     %, of the total shares of Class A common stock outstanding after the offering. In addition, selling stockholders will hold     % of the Class B common stock. Shares of our Class B common stock are not transferable until three years after the date of this prospectus. After such period, shares of Class B common stock may be transferred, in which case they will automatically convert into Class A common stock except in certain limited circumstances as described under “Description of Capital Stock—Common Stock—Conversion.”

 

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The foregoing tables assume no exercise of outstanding stock options after December 31, 2010. At December 31, 2010,             shares of Class A common stock were subject to outstanding options, at a weighted average exercise price of $            . To the extent these options are exercised there will be further dilution to new investors. See “Management—Stock Plans” and Note 11 to our consolidated financial statements included elsewhere in this prospectus.

 

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SELECTED FINANCIAL AND OPERATING DATA

The following selected financial and operating data should be read in conjunction with “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and our consolidated financial statements and the accompanying notes included elsewhere in this prospectus. We have derived the consolidated statement of operations data for the years ended December 31, 2010, 2009 and 2008 and the consolidated statement of financial condition data as of December 31, 2010 and 2009 from our audited consolidated financial statements and related notes included elsewhere in this prospectus. We have derived the consolidated statement of financial condition data as of December 31, 2008 from our audited consolidated financial statements which are not included in this prospectus. We have derived the combined statement of financial condition data as of December 31, 2007 from our unaudited combined financial statements which are not included in this prospectus. We have derived the combined statement of financial condition data as of December 31, 2006 and combined operating data for the years ended December 31, 2007 and 2006 from our audited combined financial statements which are not included in this prospectus. We have prepared our unaudited information on the same basis as our audited consolidated and combined financial statements and have included, in our opinion, all adjustments, consisting only of normal recurring adjustments, that we consider necessary for a fair presentation of this financial information.

 

     Year Ended December 31,  
     2010     2009     2008(1)(2)             2007(1)(2)     2006(2)(3)  
     (in millions)  

Consolidated Statements of Operations Data:

              

Revenues:

                

Transaction fees

   $ 668.3      $ 730.1      $ 642.3            $ 240.1      $ 21.5   

Market data fees

     46.0        50.7        41.5              10.0        0.9   

Regulatory transaction fees(4)

     111.0        125.0        6.1              —          —     

Other

     9.5        2.4        —                —          —     
                                              

Total revenues

     834.8        908.2        689.9              250.1        22.4   
 

Cost of revenues:

                

Liquidity payments

     541.7        618.2        539.6              184.2        13.9   

Routing, clearing and other fees

     82.9        86.1        106.5              68.6        8.7   

Section 31 fees(4)

     111.0        125.0        6.1              —          —     
                                              

Total cost of revenues

     735.6        829.3        652.2              252.8        22.6   
                                              

Revenues less cost of revenues

     99.2        78.9        37.7              (2.7     (0.2
 

Operating expenses:

                

Compensation and benefits

     30.6        25.1        18.0              7.9        4.0   

Depreciation

     6.5        4.8        3.0              1.0        0.5   

Systems and data communication

     10.9        7.8        5.0              1.8        0.8   

Occupancy

     1.4        1.4        0.9              0.3        0.1   

Professional and contract services

     3.1        1.3        1.9              1.3        0.3   

Regulatory costs

     4.5        2.8        0.4              —          —     

General and administrative

     7.4        5.4        5.7              1.5        0.8   
                                              

Total operating expenses

     64.4        48.6        34.9              13.8        6.5   
                                              

Operating income (loss)

     34.8        30.3        2.8              (16.5     (6.7

Interest and investment income

     0.3        0.5        2.7              2.0        0.4   

Other (expense) income

     (0.1     (0.3     2.3              (1.5     —     
                                              

Income (loss) before income tax provision

     35.0        30.5        7.8              (16.0     (6.3

Income tax provision

     15.2        6.0        0.6              —          —     
                                              

Net income (loss)

   $ 19.8      $ 24.5      $ 7.2            $ (16.0   $ (6.3
                                              

 

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Table of Contents
     Year Ended December 31,  
     2010      2009      2008(2)             2007(2)(4)     2006(3)(4)  

Basic earnings (loss) per share

   $ 1.11       $ 1.38       $ 0.41            $ (1.15   $ (1.12

Diluted earnings (loss) per share

   $ 1.08       $ 1.35       $ 0.40            $ (1.15   $ (1.12

Basic weighted average common shares outstanding

     17,814,233         17,741,333         17,741,045              13,973,117        5,607,169   

Diluted weighted average common shares outstanding

     18,303,412         18,175,746         17,969,325              13,973,117        5,607,169   

 

(1) 

Results for 2007 reflect the combined results of BATS Trading, BZX and BATS Holdings, Inc. In June 2007, BATS Holdings, Inc. was incorporated as we adopted a holding company structure. On January 1, 2008, BATS Trading and BZX became wholly-owned subsidiaries of BATS Holdings, Inc., and in March 2008, we incorporated BATS Trading Limited as a subsidiary of BATS Holdings, Inc. On December 10, 2008, we changed the name of BATS Holdings, Inc. to BATS Global Markets, Inc.

(2) 

We changed our basis of presentation on January 1, 2008 as a result of the formation of BATS Holdings, Inc. and began presenting our financial statements on a consolidated basis. As discussed in the foregoing notes, the financial information for 2007 is based upon our combined financial statements, and our financial information for 2006 is based upon the financial statements of our predecessor, BATS Trading. A vertical black line has been used between the columns to signify that the amounts shown for the periods prior to and subsequent to January 1, 2008 are not directly comparable.

(3) 

Results for 2006 represent the results of our predecessor, BATS Trading.

(4) 

As national securities exchanges, BZX and BYX are assessed fees pursuant to Section 31 of the Exchange Act. Section 31 fees are assessed on the notional value traded and are designed to recover the costs to the government of supervision and regulation of securities markets and securities professionals. Section 31 fees are paid directly to the SEC, and our national securities exchanges then pass these costs along to our members as regulatory transaction fees, recognizing these amounts as incurred in cost of revenues and revenues, respectively.

 

     As of December 31,  
     2010      2009      2008(1)             2007(1)(2)      2006(1)(2)  
     (in millions)  

Consolidated Statement of Financial Condition Data:

                 

Assets:

                   

Cash and cash equivalents

   $ 150.0       $ 107.7       $ 66.7            $ 47.3       $ 7.2   

Total assets

   $ 256.5       $ 239.0       $ 164.2            $ 153.2       $ 31.6   
                                                 

Liabilities and stockholders’ equity:

                   

Total liabilities

   $ 57.8       $ 66.2       $ 19.8            $ 16.3       $ 6.6   

Total stockholders’ equity

     198.7         172.8         144.4              136.9         25.0   
                                                 

Total liabilities and stockholders’ equity

   $ 256.5       $ 239.0       $ 164.2            $ 153.2       $ 31.6   
                                                 

 

(1) 

Results for 2007 reflect the combined results of BATS Trading, BZX and BATS Holdings, Inc. In June 2007, BATS Holdings, Inc. was incorporated as we adopted a holding company structure. On January 1, 2008 BATS Trading and BZX became wholly-owned subsidiaries of BATS Holdings, Inc., and in March 2008, we incorporated BATS Trading Limited as a subsidiary of BATS Holdings, Inc. On December 10, 2008, we changed the name of BATS Holdings, Inc. to BATS Global Markets, Inc.

(2) 

We changed our basis of accounting on January 1, 2008 as a result of the formation of BATS Holdings, Inc. and began presenting our financial statements on a consolidated basis. As discussed in the foregoing notes, the financial information for 2007 is based upon our combined financial statements, and our financial information for 2006 is based upon the financial statements of our predecessor, BATS Trading. A vertical black line has been used between the columns to signify that the amounts shown for the periods prior to and subsequent to January 1, 2008 are not directly comparable.

 

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Selected Operating Data

The following table presents selected operating data for U.S. Equities, European Equities and U.S. Options and for the periods presented. We launched BATS Europe in October 2008 and U.S. Options in February 2010. The information set forth below is not necessarily indicative of our future operations and should be read in conjunction with “Management’s Discussion and Analysis of Financial Condition and Results of Operations.”

 

     Year Ended December 31,  
     2010     2009     2008  
     (in millions except for trading days,
transaction fees and percentages)
 

U.S. Equities:

      

Average daily volume (ADV):

      

Matched shares

     888.1        1,024.6        852.9   

Routed shares

     134.9        148.8        146.4   
                        

Total shares

     1,023.0        1,173.4        999.3   
                        

Number of trading days

     252        252        253   

Transaction fees per one hundred shares matched or routed

   $ 0.249      $ 0.245      $ 0.254   

Market share(1)(2)

     10.5     10.5     9.7

European Equities:

      

Average daily notional value (ADNV):

      

Matched notional value

   1,953.2      731.0      118.3   

Routed notional value

   30.7        —          —     

Total shares (matched and routed)

     268.0        105.3        19.5   

Number of trading days

     258        257        42   

Transaction fees per Euro notional value(3)

     0.0028     0.0027     0.0030

Market share(2)(4)

     5.5     2.7     0.6

U.S. Options:

      

Total volume:

      

Matched contracts

     15.1        —          —     

Routed contracts

     10.0        —          —     
                        

Total contracts

     25.1        —          —     
                        

Number of trading days

     215       

Transaction fees per contract matched or routed

   $ 0.262        —          —     

Market share(2)(5)

     0.5     —          —     

 

(1) 

Represents our share of the U.S. equity market.

(2) 

Please see the glossary for our definition of “market share.”

(3) 

Represents transaction fees divided by total Euro notional value of transactions.

(4) 

Represents our share of European trading in the securities available for trading on BATS Europe for the years ended December 31, 2010 and 2009 and for the period from October 31, 2008 (the date BATS Europe commenced trading) to December 31, 2008.

(5) 

Represents our share of the U.S. equity options market for the period from February 26, 2010 (the date we commenced trading U.S. listed equity options) to December 31, 2010.

 

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     Year Ended December 31,  
     2010     2009     2008     2007     2006  
     (in millions except for percentages, customers, headcount,
latency and exchange rates)
 

Other Data:

          

EBITDA(1)

   $ 41.2      $ 34.8      $ 8.1      $ (17.1   $ (6.2

EBITDA margin(2)

     41.6     44.1     21.6     *        *   

Adjusted EBITDA(1)

   $ 47.3      $ 38.2      $ 10.8      $ (15.8   $ (6.2

Adjusted EBITDA margin(3)

     47.7     48.4     28.7     *        *   

Operating income as a percentage of revenues less cost of revenues

     35.1     38.4     7.6     *        *   

Working capital(4)

   $ 178.9      $ 156.9      $ 133.1      $ 133.2      $ 23.5   

Capital expenditures

   $ 6.4      $ 5.7      $ 10.7      $ 3.2      $ 0.7   

Customers (as of period end):

          

BZX

     388        382        297        216        87   

BYX

     202        —          —          —          —     

U.S. Options

     60        —          —          —          —     

BATS Europe

     88        74        34        —          —     

Employee headcount

     110        97        84        34        21   

Up-time percentage(5)

     99.999     99.947     (6)      —          —     

BZX latency(7)

     164.4        247.0        337.7        616.2        —     

Chi-X Europe data:

          

Market share(8)

     17.4     12.5     7.8     0.4     —     

Members/participants

     133        112        82        35        —     

Average British pound/U.S. dollar exchange rate

   $ 1.546      $ 1.565      $ 1.575 (9)      *        *   

Average Euro/U.S. dollar exchange rate

   $ 1.327      $ 1.394      $ 1.318 (9)      *        *   

 

* Not meaningful.
(1) 

“EBITDA” is defined as income before interest, income taxes, depreciation and amortization. Adjusted EBITDA is defined as EBITDA before stock-based compensation expense. EBITDA and Adjusted EBITDA do not represent, and should not be considered as, alternatives to net income or cash flows from operations, each as determined in accordance with U.S. GAAP. We have presented EBITDA and Adjusted EBITDA because we consider them important supplemental measures of our performance and believe that they are frequently used by analysts, investors and other interested parties in the evaluation of companies. Other companies may calculate EBITDA and Adjusted EBITDA differently than we do. EBITDA and Adjusted EBITDA have limitations as analytical tools, and you should not consider them in isolation or as substitutes for analysis of our results as reported under U.S. GAAP.

 

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The following is a reconciliation of net income (loss) to EBITDA and Adjusted EBITDA:

 

     Year Ended December 31,  
     2010     2009     2008     2007     2006  
     (in millions)  

Net income (loss)

   $ 19.8      $ 24.5      $ 7.2      $ (16.0   $ (6.3

Interest

     (0.3     (0.5     (2.7     (2.0     (0.4

Income tax provision

     15.2        6.0        0.6        —          —     

Depreciation and amortization

     6.5        4.8        3.0        0.9        0.5   
                                        

EBITDA

     41.2        34.8        8.1        (17.1     (6.2

Stock-based compensation expense

     6.1        3.4        2.7        1.3        —     
                                        

Adjusted EBITDA

   $ 47.3      $ 38.2      $ 10.8      $ (15.8   $ (6.2
                                        

 

(2) 

EBITDA margin represents EBITDA divided by revenues less cost of revenues.

(3) 

Adjusted EBITDA margin represents Adjusted EBITDA divided by revenues less cost of revenues.

(4) 

“Working capital” is defined as currents assets less current liabilities.

(5) 

“Up-time percentage” represents the portion of the time in the period shown when BZX’s quotations were immediately and automatically accessible, as defined in the rules under Regulation NMS.

(6) 

We launched BZX in November 2008. From the launch of BZX through December 31, 2008, we had a 100% up-time percentage.

(7) 

BZX latency represents the average time in microseconds (one-millionth of a second) required to process customer orders during the period shown from the time they were received and read by our gateway software process assigned to a customer until the corresponding order acknowledgment or cancel message from our matching engine was received by our gateway software process and was ready to be sent back to the customer.

(8) 

Represents Chi-X Europe’s share of European trading in the securities available for trading on Chi-X Europe. Please see the glossary for our definition of “market share.”

(9) 

Represents average exchange rates for the period October 1, 2008 through December 31, 2008. BATS Europe commenced operations in October 2008.

 

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MANAGEMENT’S DISCUSSION AND ANALYSIS

OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The following discussion of our financial condition and results of operations should be read in conjunction with our consolidated financial statements and the notes thereto included in this prospectus. The following discussion contains forward-looking statements. Actual results could differ materially from the results discussed in the forward-looking statements. See “Risk Factors” and “Special Note Regarding Forward-Looking Statements” above.

Overview

We are an innovative global financial technology company that develops and operates electronic markets for the trading of listed cash equity securities in the United States and Europe and listed equity options in the United States. For the first quarter of 2011, we had a 10.8% share of the U.S. equity market and a 2.1% share of the U.S. equity options market. In Europe, for the same period, we had a 6.2% share of European trading in the securities available for trading on BATS Europe.

Our principal objective is to make markets better by minimizing inefficiencies and mitigating trade execution risk for market participants. Unlike traditional market operators, we are a technology company at our core, and we developed, own and operate the BATS trading platform. Our proprietary platform powers all of our markets and is designed to offer one of the fastest and most reliable trading systems available.

History

We were formed in 2005 as an alternative to the New York Stock Exchange, or NYSE, and The NASDAQ Stock Market, or NASDAQ, in response to increased consolidation among U.S. listed cash equity market centers. In January 2006, we launched our electronic communication network, or ECN, a type of alternative trading system, or ATS, which initially focused on the trading of NASDAQ-listed securities and in May 2006 expanded to include trading of American Stock Exchange (now NYSE Amex)-listed securities.

In January 2007, we introduced an inverted pricing special during which our market share of trading in NASDAQ-listed cash equity securities increased from 4.9% at the beginning of that month to 9.6% at the end of that month and averaged 8.0% per month for the remainder of that year. We began trading NYSE-listed securities in February 2007 and offered a one-month inverted pricing special in NYSE-listed securities in September 2007. Our market share of NYSE-listed securities increased from 2.7% for the month of August 2007 to 7.2% for the month of September 2007 and averaged 5.5% per month for the remainder of that year. We also offered an inverted pricing special on NYSE Arca- and NYSE Amex-listed securities from August 31, 2007 through April 30, 2009, during which time our market share of such securities grew from 5.7% for the month of August 2007 to 14.3% for the month of April 2009 and averaged 14.7% per month for the remainder of 2009.

In March 2008, we decided to enter the European market and sought approval from the Financial Services Authority, or FSA, to operate a multilateral trading facility, or MTF. Our MTF, which we refer to as BATS Europe, offers trading in cash equity securities listed on 15 national exchanges across Europe. Seeking to compete on a pan-European basis against incumbent national exchanges, we launched BATS Europe in October 2008. Based on our success with pricing specials in the United States, BATS Europe offered inverted pricing specials in September 2009 on securities listed on the London Stock Exchange, or LSE, from June 2009 through July 2009 on securities listed on certain NYSE Euronext European markets and from June 2009 through October 2009 on all exchange-traded funds, or ETFs, traded on BATS Europe. For the first quarter of 2011, BATS Europe was the second largest pan-European MTF in terms of market share and had a 6.2% share of European trading in the securities available for trading on BATS Europe.

In November 2008, we converted our ECN to a national securities exchange, BZX, which allowed us to participate in and earn market data fees from the U.S. tape plans, reduce our clearing costs and operate a primary listings business, which we recently announced plans to launch.

 

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In February 2010, in the United States, we began trading U.S. listed equity options on BZX. While we did not offer any inverted pricing specials on our U.S. listed equity options market in 2010, we recently introduced the concept of “NBBO setter” pricing, which refers to customers who set the national best bid or best offer, or NBBO, for a listed equity option. NBBO setter pricing provides customers who execute a specified minimum volume with more favorable pricing for listed equity options orders posted on our market that improve the then current NBBO. This in turn provides better execution prices for other customers. We initiated NBBO setter pricing on our U.S. listed equity options market in January 2011, and our share of the U.S. equity options market increased from approximately 0.7% for the month of December 2010 to 2.9% for the month of March 2011.

In order to grow our U.S. market share, in October 2010, we launched BYX, a second national securities exchange. Like BZX, BYX offers trading in listed cash equity securities and exchange-traded products, such as ETFs, but BYX targets different market segments than BZX by offering an alternative approach. BYX had captured approximately a 2.1% share of the U.S. equity market for the month of March 2011. In addition, in order to continue to capture market share, we are currently offering an inverted pricing special on BYX. For the first quarter of 2011, BZX and BYX combined had a 10.8% share of the U.S. equity market, and we were the third largest exchange operator in the United States after NYSE Euronext and The NASDAQ OMX Group, Inc.

As discussed below, in February 2011, we signed a definitive agreement to acquire Chi-X Europe, which operates the largest pan-European MTF.

Business Segments

We currently operate along three business segments. Our management allocates resources, assesses performance and manages our business according to these segments:

 

   

U.S. Equities. Our U.S. Equities segment includes listed cash equities transaction services that occur on our national securities exchanges in the United States, BZX and BYX. This segment commenced operations in January 2006 with our ECN and was our only segment until the addition of European Equities in October 2008. For the year ended December 31, 2010, the U.S. Equities segment represented 96.8% of our total revenues.

 

   

European Equities. Our European Equities segment includes the pan-European listed cash equities transaction services that occur on our MTF, BATS Europe. This operation launched in October 2008, and our European Equities segment accounted for 2.3% of our total revenues for the year ended December 31, 2010.

 

   

U.S. Options. Our U.S. Options segment includes our listed equity options market on BZX. We began offering trading in listed equity options in February 2010, and our U.S. Options segment contributed 0.9% of our total revenues for the year ended December 31, 2010. Currently, BYX does not offer trading in listed equity options.

Chi-X Europe Acquisition

In February 2011, we entered into a definitive agreement to acquire Chi-X Europe pursuant to which Chi-X Europe’s shareholders will receive, in the aggregate, approximately 4.4 million newly issued shares of our common stock and approximately $36 million in cash. In addition, we may pay up to an additional $65 million in cash to Chi-X Europe’s shareholders in the third quarter of 2012, if certain market-share benchmarks are met. We expect to benefit from various synergies as a result of the acquisition, including the transition of Chi-X Europe to our trading platform, which we expect to be completed during the fourth quarter of 2011. Subject to antitrust clearance in the United Kingdom, the transaction is expected to close during the second quarter of 2011. We expect to incur one-time acquisition related costs of approximately $8 million to $10 million in 2011.

 

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The acquisition will be accounted for under the acquisition method of accounting prescribed in Financial Accounting Standards Board, or FASB, Accounting Standards Codification, or ASC, 805—Business Combinations. Under the acquisition method, the acquisition price will be allocated to the tangible and identifiable intangible assets acquired and liabilities assumed based on their respective fair values, with the remainder allocated to goodwill. The fair values recorded for property and equipment, trade name, customer relationships and contracts or other identifiable intangible assets will result in material additional depreciation and amortization expense after the consummation of the acquisition. The amount of depreciation and amortization is based upon the fair values and the estimated useful lives of the respective assets.

Upon the completion of the acquisition, Chi-X Europe’s assets, liabilities and operations, including amortization and depreciation expenses, will be reported under our European Equities segment. As a result of the acquisition, we will have goodwill of approximately $149.1 million that will be assessed for impairment under ASC 350—Intangibles—Goodwill and Other. We also expect to have approximately $99.4 million in identifiable intangible assets, which will result in approximately $3 million to $4 million in amortization expense in 2011. In addition, we expect to record the fair value of the liability for the contingent consideration of up to $65 million to be paid to the former owners of Chi-X Europe if certain criteria are met by June 2012. The fair value of the liability for the contingent consideration will be reassessed each reporting period, and any change in the liability will be recorded in our results of operations.

Our Model

Like many of our competitors, we have adopted a “maker-taker” or “taker-maker” pricing model in our markets instead of the historical pricing model in the U.S. listed equity securities market that involves charging a transaction fee for each party to a trade. The maker-taker pricing model is designed to incentivize market makers to provide liquidity on a continuous basis. Participants are attracted to markets that have continuous, deep liquidity, which provides more opportunity to buy and sell equities immediately and with minimal adverse effect on prices. Because market makers supply a valuable service to markets by providing liquidity, maker-taker pricing rewards them with a rebate.

Under our maker-taker pricing model, on BZX (for both listed cash equity securities and listed equity options) and on BATS Europe, a customer posting an order on our book, which we refer to as the liquidity maker, is paid a rebate for an execution occurring against that order, and a customer executing against an order resting on our book, which we refer to as the liquidity taker, is charged a fee. We generate a substantial portion of our operating income from the difference between the “maker” rebate and the “taker” fee. We believe this type of fee schedule is attractive to customers who regularly provide liquidity. Although customers must pay a fee to access that liquidity, that fee is explicitly disclosed and charged to all customers and potentially results in a better all-in transaction price than could be obtained on an exchange using a historical pricing model.

The BYX “taker-maker” pricing model provides that a liquidity taker will be paid a rebate for executing against an order resting on our book, and the liquidity provider will be charged a fee for posting such an order. In this case, we generate operating income from the difference between the “maker” fee and the “taker” rebate. Currently, both the fee and the rebate are significantly less than the rebates and fees in place on BZX. We believe this appeals to market participants who are primarily interested in the most cost-effective means of accessing resting liquidity, but less concerned about the depth of liquidity available on the market. In addition, we believe this model appeals to market participants trading lower-priced securities.

As mentioned above, on occasion, we offer pricing specials on our markets in order to attract additional liquidity and gain market share. In such cases, we may rebate slightly more to the liquidity maker, in the case of BZX and BATS Europe, or slightly more to the liquidity taker, in the case of BYX, than we collect in fees from the other party to the trade. While pricing specials may decrease our per-transaction profitability while in effect, they have historically generated incremental trading and quoting activity, which in turn generates increased market data revenue from our share of the revenue collected from the U.S. tape plans. Moreover, our focus when entering new markets is to quickly grow market share and then focus on profitability once we have achieved

 

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critical mass and increased liquidity. We believe that offering such pricing specials for temporary periods of time induces our customers to send us additional orders and that much of any resulting gain in market share will sustain itself upon the expiration of a pricing special.

For unfilled orders, we also provide our customers a smart-order routing service, enabling the onward routing of unfilled orders to other market centers. In the United States, this is facilitated through our wholly-owned broker-dealer subsidiary, BATS Trading. In Europe, BATS Trading Limited was granted regulatory permission to operate an order routing facility on December 2, 2009 and is one of the few market centers in Europe that provides such routing services for lit venues.

In addition, in the United States, we derive a substantial portion of our revenue from market data fees, discussed below under “Components of Revenue—Market Data Fees,” which reflect our proportionate share of revenue from the U.S. tape plans with respect to trades matched on BZX and BYX.

Components of Revenues

Our revenues consist of:

 

   

transaction fees;

 

   

market data fees;

 

   

regulatory transaction fees; and

 

   

other.

The primary and largest source of our revenues is transaction fees.

Transaction Fees

General

Total transaction fees during a period are variable, based on trading volume and pricing per share on our U.S. listed cash equity markets, pricing as a percentage of notional value on our European listed cash equities market and pricing per contract on our U.S. listed equity options market.

Transaction fees consist of “taker” fees (or in the case of BYX, “maker” fees) and routing fees charged on securities that are routed out to another market center. Transaction fees are considered earned upon the execution of the trade and are recognized on a trade-date basis. The “taker” fees (or in the case of BYX, “maker” fees) from transactions executed through our markets are recorded on a gross basis in revenues, with “maker” rebates (or in the case of BYX, “taker” rebates) recorded on a gross basis in cost of revenues. Transaction fee revenues accounted for 80.1%, 80.4% and 93.1% of our total revenues in 2010, 2009 and 2008, respectively.

 

   

We earn transaction fees in the United States from the trading of listed cash equity securities on our two national securities exchanges, BZX and BYX. U.S. listed cash equity securities trading revenues are assessed on a per-share basis. Transaction fees from U.S. Equities accounted for 96.1% of our total transaction fees in 2010.

 

   

We earn transaction fees in Europe from the trading of listed cash equity securities on BATS Europe. European listed cash equity securities trading revenues are assessed on a notional-value basis. We launched our European operations in October 2008. Transaction fees from our European operations accounted for 2.9% of our total transaction fees in 2010.

 

   

We earn transaction fees from the trading of listed equity options on BZX. U.S. listed equity options trading revenues are assessed on a per-contract basis. Transaction fees from U.S. Options accounted for 1.0% of our total transaction fees in 2010.

 

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Trading volumes

Transaction fees for U.S. Equities, European Equities and U.S. Options are primarily dependent on overall market volume and our market share thereof.

U.S. Equities. The U.S. listed cash equity securities markets have historically experienced growth in trading volumes. From time to time, however, volumes have declined due to economic performance, volatility and other related factors.

During the period from 2003 to 2007, the U.S. listed cash equity securities market indices experienced substantial growth. Overall market volumes also increased dramatically, in part as a result of regulatory changes, including the implementation of Regulation NMS. See “Business—Industry Overview.” In 2008, the U.S. economy entered a recession on the heels of a macro-economic credit crisis, resulting in a severe decline in equity market indices, an increase in volatility and a severely challenging business environment. While there are indications that the economy began to emerge from the recession in mid-2009, today the economic and geopolitical climates remain uncertain, volatility has declined and overall market volumes are substantially below their peak in 2009.

The following summarizes changes in our U.S. Equities segment average daily trading volume, or ADV, for the years ended December 31, 2010, 2009 and 2008 and the percent changes in our ADV from 2009 to 2010 and from 2008 to 2009:

 

     Year Ended December 31,     Percent Change
from 2009 to 2010
    Percent Change
from 2008 to 2009
 
     2010     2009     2008      
     (in millions, except percentages)              

U.S. Equities ADV:

          

Matched shares

     888.1        1,024.6        852.9        (13.3 )%      20.1

Routed shares

     134.9        148.8        146.4        (9.3     1.6   
                            

Total shares

     1,023.0        1,173.4        999.3        (12.8     17.4   
                            

Market share(1)

     10.5     10.5     9.7    

 

(1) 

Represents our share of the U.S. equity market. Please see the glossary for our definition of “market share.”

ADV for our U.S. Equities segment was 1,023.0 million shares in 2010, compared to 1,173.4 million in 2009 and 999.3 million in 2008, a decrease of 12.8% in 2010 from 2009 and an increase of 17.4% in 2009 from 2008. Average daily matched shares in our U.S. Equities segment decreased 13.3% in 2010 from 2009 and increased 20.1% in 2009 from 2008. Total trading days in the United States in 2010, 2009 and 2008 were 252, 252 and 253, respectively. The total U.S. equities market ADV decreased 13.0% in 2010 from 2009 and increased 10.1% in 2009 from 2008.

Our U.S. Equities segment volume decreased in 2010 from 2009 as a result of the economic climate, reduced volatility and the overall market volumes being substantially below their 2009 peaks. However, during 2010, our share of the U.S. equities market remained constant at 10.5%, equal to our share of the U.S. equities market in 2009.

European Equities. Like the U.S. listed cash equity securities markets, the European listed cash equity securities markets have historically experienced growth in trading volumes. From time to time, however, volumes have declined due to economic performance, volatility and other related factors.

The European market implemented MiFID in November 2007 which accelerated competition between market centers. See “Business—Industry Overview.” Chi-X Europe was the first MTF to enter the European market for listed cash equity securities and the first to introduce a maker-taker pricing model in that market. Other MTFs, including BATS Europe, soon followed. As a result of this increased competition, incumbent

 

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exchanges which previously enjoyed a nearly 100% share of trading in securities listed on their own exchanges, lost significant market share. For example, the London Stock Exchange, or LSE, which represented 99.6% of on-exchange trading in LSE-listed cash equity securities for 2007, has seen its share of trading in LSE-listed cash equity securities decline to approximately 21.1% for the first quarter of 2011.

In 2008, the European economy, like the U.S. economy, entered a recession on the heels of a macro-economic credit crisis, resulting in a severe decline in equity market indices, an increase in volatility and a severely challenging business environment. There are indications that the economy began to emerge from the recession in mid-2009 similar to the U.S. market, but unlike the U.S. market where overall market volumes declined in 2010, both overall volumes and notional volumes in Europe were substantially higher in 2010 compared to 2009. In this climate, BATS Europe’s revenues and market share have continued to climb following the 2008 financial crisis.

The following summarizes changes in ADNV for European Equities for the years ended December 31, 2010, 2009 and 2008:

 

     Year Ended December 31,     Percent Change
from 2009 to 2010
    Percent Change
from 2008 to 2009
 
     2010     2009     2008      
     (in millions, except percentages)              

European Equities ADNV:

          

Matched notional value

   1,953.2      731.0      118.3        167.2     518.1

Routed notional value

     30.7        —          —          *        *   
                            

Total notional value

   1,983.9      731.0      118.3        171.4     518.1
                            

Total shares

     268.0        105.3        19.5        154.4     439.3

Market share(1)

     5.5     2.7     0.6    

 

* Not meaningful.
(1) 

Represents our share of European trading in the securities available for trading on BATS Europe for the years ended December 31, 2010 and 2009 and for the period from October 31, 2008 (the date BATS Europe commenced trading) to December 31, 2008. Please see the glossary for our definition of “market share.”

ADNV for our European Equities segment was €2.0 billion in 2010, compared to €731.0 million in 2009 and €118.3 million in 2008, the year that BATS Europe’s operations commenced, an increase of 171.4% in 2010 from 2009 and an increase of over 500% in 2009 from 2008. Average daily matched notional value in our European Equities segment increased 167.2% in 2010 from 2009 and increased 518.1% in 2009 from 2008. Total trading days for BATS Europe in 2010, 2009 and 2008 were 258, 257 and 42, respectively.

In 2010, our share of European trading in the securities available for trading on BATS Europe was 5.5%, an increase from 2.7% in 2009. This demonstrates that we were able to capitalize on the substantially higher overall market average daily notional value in Europe in 2010, which increased 30.7% compared to 2009.

U.S. Options. Over the last 10 years, ADV in exchange-traded options for the entire market has witnessed significant growth, with ADV for the entire market of 15.8 million contracts in 2010, compared to 2.9 million in 2001, which represents a 9-year compound annual growth rate of nearly 20.8%. The options exchange industry has not been immune to the financial crisis that began in the fall of 2008, however. Most participants in the options markets, including major investment banks, hedge funds and institutional and retail investors, suffered reductions in their asset and capital bases and generally reduced their level of trading activity. As a result, the growth in exchange options trading in 2009 did not keep pace with historical and recent trends as total U.S. industry volume of 3.4 billion contracts in 2009 represented an increase of only 2.5% compared to 2008 levels. Exchange-traded options industry volume in 2010 was 4.0 billion contracts, which represented an increase of 18.5% compared to 2009.

 

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We began trading listed equity options in the United States in February 2010. The U.S. Options segment handled 25.1 million contracts from the inception of trading on February 26, 2010 through December 31, 2010 and had a 0.5% share of the U.S. equity options market during that period.

Pricing

We strive to keep our pricing as competitive and simple as possible. We generally assess prices on a per-share basis in our U.S. listed cash equities markets, as a percentage of notional value traded in our European listed cash equity securities market and on a per-contract basis in our U.S. listed equity options market.

In order to remain competitive in the U.S. listed cash equity securities market, we have historically maintained a low spread between our “taker” fee (or in the case of BYX, “maker” fee) and our “maker” rebate (or in the case of BYX, “taker” rebate). In Europe, we also use a low spread “maker-taker” pricing model. We have also employed a number of pricing specials, as discussed above.

Market Data Fees

We earn market data fees from U.S. tape plans, including the Unlisted Trading Privileges Plan, or UTP, Consolidated Tape Association Plan, or CTA, Consolidated Quotation System Plan, or CQS, and the Options Price Reporting Authority, LLC, or OPRA. Fees, net of plan costs, from UTP, CTA and CQS are allocated and distributed to plan participants according to their share of tape fees based on a formula, required by Regulation NMS, that takes into account both trading and quoting activity. Market data fees from OPRA are allocated based upon the share of total options transactions cleared for each of the OPRA members. Market data fees accounted for 5.5%, 5.6% and 6.0% of our total revenues in 2010, 2009 and 2008, respectively. We currently do not receive any market data fees for trades executed on BATS Europe.

Regulatory Transaction Fees

BZX and BYX, as national securities exchanges, are assessed fees pursuant to Section 31 of the Exchange Act. BATS Europe is not assessed any Section 31 fees because it is not a national securities exchange. Section 31 fees are assessed on the notional value of equities and options traded and are designed to recover the costs to the U.S. government of supervision and regulation of securities markets and securities professionals. These fees are paid directly to the SEC by BZX and BYX. BZX and BYX, in turn, collect regulatory transaction fees from their customers that equal the Section 31 fees that they pay to the SEC and recognize these amounts as incurred in revenues and costs of revenues, respectively. We act as the principal on these transactions, and therefore these transactions are reported gross in our consolidated statements of income. Regulatory transaction fees received are included in cash and cash equivalents and financial investments in our consolidated statements of financial condition. As required by law, the amounts due to the SEC are remitted semiannually in March and September. Because we hold the cash received until payment is remitted to the SEC, we earn interest on the related cash balances. Prior to November 2008, as the operator of an ECN, we were not subject to Section 31 fees. However, we paid comparable fees to the Financial Industry Regulatory Authority, or FINRA, and other market centers and similarly passed those fees on to our customers. We acted as an agent on those transactions, and therefore they were reported net in our consolidated statements of income. Regulatory transaction fees accounted for 13.3%, 13.7% and 0.9% of our total revenues in 2010, 2009 and 2008, respectively.

Other

Other revenues consist of port fees, which represent fees paid for connectivity to our markets, and, more recently, additional value-added products revenues. Revenues for providing access to our markets are recognized when the service is provided. We began charging port fees during the fourth quarter of 2009. Other revenues accounted for 1.1%, 0.3% and 0.0% of our total revenues in 2010, 2009 and 2008, respectively.

 

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In 2010, we received regulatory approval to offer additional value-added products, such as historical market data in the United States and a real-time last sale data feed, for a fee. In addition, we are currently developing a variety of other products that we expect to be able to provide for a fee in the future. Revenues from these products are subscription-based and are recognized over the life of the relevant subscription.

Components of Cost of Revenues

Cost of revenues consist of:

 

   

liquidity payments;

 

   

routing and clearing;

 

   

Section 31 fees; and

 

   

other.

Liquidity payments are the largest component of our cost of revenues.

Liquidity Payments

Liquidity payments are directly correlated to the volume of securities traded on our markets. As mentioned above, we record the liquidity rebate paid to market participants providing liquidity, in the case of BZX and BATS Europe, as cost of revenue. During 2010, BYX began offering a pricing model pursuant to which we rebate liquidity takers for executing against an order resting on our book, which is also recorded as a cost of revenue.

Routing and Clearing

Routing and clearing are also correlated to the volume of securities routed to other market venues. We offer a multitude of order routing strategies to our customers. These strategies allow our customers to access other markets through the use of our smart-order routing tools. Most of these strategies first seek to trade against orders resting on our order books and, if filled in full, are not routed to other markets. Therefore, total routing expenses are inversely correlated to the depth on our order books because as the volume of securities traded by our customers that are matched by us against orders resting on our books increases, routing expenses decrease. In Europe, we began operating an order routing facility in December 2009 and are one of the few market centers that provides such routing services for lit venues.

As a result of the transition of our listed cash equities market to a national securities exchange, BZX, in 2008, we no longer incur fees to clear matched equity trades. However, BATS Trading, the routing facility for our U.S. listed cash equities and listed equity options markets, continues to incur clearing fees on all activity routed to other market centers because it relies on third-party clearing firms to provide this service. We continue to seek low cost initiatives for reaching other market centers and periodically negotiate new pricing contracts and methods to reach those markets.

Section 31 Fees

BZX and BYX are assessed fees pursuant to the Exchange Act designed to recover the costs to the U.S. government of supervision and regulation of securities markets and securities professionals. We treat these fees as a pass-through charge to customers executing eligible listed cash equities and listed equity options trades on BZX and BYX. Accordingly, we recognize that amount that we are charged under Section 31 as a cost of revenues and the corresponding amount that we charge our customers as regulatory transaction fees revenue. Since the regulatory transaction fees recorded in revenues are equal to the Section 31 fees recorded in cost of revenues, there is no impact on our operating income.

 

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As the operator of an ECN, prior to BZX’s registration as a national securities exchange in the fourth quarter of 2008, we paid equivalent transaction fees to FINRA, but these fees are reported net in our consolidated statement of income because we acted as an agent on these transactions. Given that BATS Europe is not a national securities exchange, it does not pay Section 31 fees.

Other

Other costs of revenues are mostly isolated in nature and non-recurring in the normal course of our business. The most significant items composing these costs have been entrance fees paid by BZX and BYX to become members of the UTP, CTA and CQS U.S. tape plans in conjunction with BZX becoming a national securities exchange in 2008 and BYX becoming a national securities exchange in 2010.

Components of Operating Expenses

Operating expenses consist of:

 

   

compensation and benefits;

 

   

depreciation;

 

   

systems and data communication;

 

   

occupancy;

 

   

professional contract services;

 

   

regulatory costs; and

 

   

general and administrative.

Compensation and benefits represent our largest operating expense and tend to be driven by our staffing requirements and the general dynamics of the employment market. Additional operating expenses generally support the infrastructure of our markets and technology platform and are primarily fixed in nature. While these expenses do not vary as a direct result of trading volume, they may increase over time as we enhance capacity and improve performance. As a public corporation, we expect general and administrative and professional costs to increase as we satisfy our obligations under the U.S. securities laws and comply with the Sarbanes-Oxley Act. The increases could include, but are not limited to, an increase in staffing levels to provide support in meeting the operational and regulatory requirements of a public corporation, additional professional fees paid to external auditors, consultants and outside counsel and fees paid to a third-party institution to provide transfer agency services for the maintenance of stockholder records.

Interest and Investment Income

Interest and investment income represents the return on the investment of excess cash. We invest our excess cash in highly liquid, capital-preserving, short-term financial investments, such as U.S. Treasury securities.

Other Income (Expense)

Other income (expense) consists of foreign currency gains (losses) and for 2008 losses on the sale of accounts receivable. Foreign currency gains (losses) are recognized by us, as the functional currency of BATS Europe is the British pound.

Losses on the sale of accounts receivable were the result of a receivables purchase agreement we entered into in 2007 to sell a portion of our receivables to Wedbush Securities each month to fund minimum capital requirements applicable to ECNs. Losses from the sale of such receivables were $668,887 during 2008 and were recorded in other income (expense) in our consolidated statements of income. This agreement was terminated in the fourth quarter of 2008.

 

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Income Taxes

We operated in a cumulative net loss position from inception through 2008. As a result of the net losses accumulated, the U.S. income tax benefit recorded was fully offset by a valuation allowance during those years as it was uncertain whether we would be able to utilize the associated deferred tax assets in the future. During 2009, we achieved a cumulative net income position, and therefore the valuation allowance was released in full as we had a change in our judgment about the ability to realize our deferred tax assets.

We have elected to treat BATS Europe as a disregarded entity for U.S. federal income tax purposes. As a result, the activities for BATS Europe are treated as our branch, and taxable income or loss reported by BATS Europe is included in our consolidated U.S. federal income tax return. If BATS Europe becomes profitable, we will evaluate this election in conjunction with the estimated impact of the pending acquisition of Chi-X Europe. If the election is revoked, there may be a tax cost to electing to treat our U.K. entities as controlled foreign corporations, but it could result in a lower effective tax rate as corporate tax rates in the United Kingdom are generally lower than U.S. corporate tax rates. For U.K. tax purposes, BATS Europe has incurred, and is continuing to incur, tax losses which will be carried forward and available to offset future U.K. tax liabilities.

Results of Operations

The following table sets forth our consolidated statements of operations data for periods presented as a percentage of total revenues:

 

     Year Ended December 31,  
       2010         2009         2008    

Revenues:

      

Transaction fees

     80.1     80.4     93.1

Market data fees

     5.5        5.6        6.0   

Regulatory transaction fees

     13.3        13.7        0.9   

Other

     1.1        0.3        0.0   
                        

Total revenues

     100.0        100.0        100.0   

Cost of revenues:

      

Liquidity payments

     64.9        68.1        78.2   

Routing and clearing

     9.8        9.5        15.3   

Section 31 fees

     13.3        13.7        0.9   

Other

     0.1        0.0        0.1