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BATS Global Markets, Inc. · IPO:  S-1/A · On 3/21/12

Filed On 3/21/12, 5:08pm ET   ·   Accession Number 1193125-12-125661   ·   SEC File 333-174166

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  As Of                Filer                Filing    For/On/As Docs:Size              Issuer               Agent

 3/21/12  BATS Global Markets, Inc.         S-1/A                  2:5.3M                                   RR Donnelley/FA

Initial Public Offering (IPO):  Pre-Effective Amendment to Registration Statement (General Form)   —   Form S-1
Filing Table of Contents

Document/Exhibit                   Description                      Pages   Size 

 1: S-1/A       Amendment #5 to S-1                                 HTML   3.23M 
 2: EX-10.25    Form of Amended & Restated Long Term Incentive      HTML     78K 
                          Plan                                                   


S-1/A   —   Amendment #5 to S-1
Document Table of Contents

Page (sequential) | (alphabetic) Top
 
11st Page   -   Filing Submission
"Table of Contents
"Prospectus Summary
"Risk Factors
"Special Note Regarding Forward-Looking Statements
"Chi-X Europe Acquisition
"Unaudited Selected Pro Forma Financial Data
"Reclassification and Reverse Stock Split
"Use of Proceeds
"Dividend Policy
"Capitalization
"Dilution
"Selected Financial and Operating Data
"Management's Discussion and Analysis of Financial Condition and Results of Operations
"Business
"Regulation
"Management
"Executive Compensation
"Certain Relationships and Related Transactions
"Principal and Selling Stockholders
"Description of Capital Stock
"Material U.S. Federal Tax Considerations for Non-U.S. Holders of Class A Common Stock
"Shares Eligible for Future Sale
"Underwriters
"Validity of Class A Common Stock
"Experts
"Where You Can Find More Information
"Appendix
"Index to Consolidated Financial Statements
"Report of Independent Registered Public Accounting Firm
"Consolidated Statements of Financial Condition
"Consolidated Statements of Income
"Consolidated Statements of Stockholders' Equity and Comprehensive Income
"Consolidated Statements of Cash Flows
"Notes to Consolidated Financial Statements
"Report of Independent Auditors
"Income Statements
"Balance Sheets
"Statement of Changes in Equity
"Statement of Cash Flows
"Notes to the Financial Statements
"Interim Income Statements
"Interim Statement of Financial Position
"Notes to Interim Financial Statements

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  Amendment #5 to S-1  
Table of Contents

As filed with the Securities and Exchange Commission on March 21, 2012

Registration No. 333-174166

 

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

 

Amendment No. 5

TO

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

 

Amount

To Be
Registered(1)

 

Proposed Maximum
Aggregate

Offering Price

Per Share

 

Proposed

Maximum
Aggregate
Offering  Price(2)

 

Amount Of

Registration Fee(3)

Class A Common Stock, par value $0.01 per share

  7,241,353   $18.00   $130,344,354   $15,133

 

 

(1) 

Includes 944,524 shares that the underwriters have the option to purchase to cover over-allotments, if any.

(2) 

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

(3) 

Previously paid.

 

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.

 

 

 


Table of Contents

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 jurisdiction where the offer or sale is not permitted.

 

PRELIMINARY PROSPECTUS (Subject to Completion)

Issued March 21, 2012

6,296,829 Shares

 

LOGO

BATS Global Markets, Inc.

CLASS A COMMON STOCK

 

 

The selling stockholders of BATS Global Markets, Inc. identified in this prospectus are offering 6,296,829 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 the initial public offering of our shares, and no public market exists for our shares. We anticipate that the initial public offering price will be between $16.00 and $18.00 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 two and one-half votes. Upon completion of this offering, our strategic investors will collectively own approximately 79.0% of the total voting power of our outstanding capital stock. See “Principal and Selling Stockholders.”

Our Class A common stock has been approved for listing on BATS Exchange, Inc. (BZX) under the symbol “BATS.”

 

 

Investing in our Class A common stock involves risks. See “Risk Factors” beginning on page 17.

 

 

PRICE $             A SHARE

 

 

 

     Per Share      Total  

Price to public

   $                    $                

Underwriting discounts and commissions

   $         $     

Proceeds to selling stockholders

   $         $     

One of the selling stockholders named herein has granted the underwriters the right to purchase an additional 944,524 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                     , 2012.

 

 

 

Morgan Stanley   Citigroup   Credit Suisse

 

 

 

Deutsche Bank Securities

     

                                     Wedbush Securities

 
 

                J.P. Morgan

      BofA Merrill Lynch
Raymond James      
                         Sandler O’Neill + Partners, L.P.  
          Rosenblatt Securities Inc.
      Nomura

                    , 2012


Table of Contents

LOGO


Table of Contents

TABLE OF CONTENTS

 

     Page  

Prospectus Summary

     1   

Risk Factors

     17   

Special Note Regarding Forward-Looking Statements

     37   

Chi-X Europe Acquisition

     38   

Unaudited Selected Pro Forma Financial Data

     39   

Reclassification and Reverse Stock Split

     44   

Use of Proceeds

     46   

Dividend Policy

     46   

Capitalization

     47   

Dilution

     49   

Selected Financial and Operating Data

     51   

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

     56   

Business

     100   

Regulation

     121   

Management

     130   

Executive Compensation

     138   

Certain Relationships and Related Transactions

     158   

Principal and Selling Stockholders

     162   

Description of Capital Stock

     168   

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

     178   

Shares Eligible for Future Sale

     180   

Underwriters

     183   

Validity of Class A Common Stock

     188   

Experts

     188   

Where You Can Find More Information

     188   

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.

 

i


Table of Contents

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), BATS Trading Limited (operator of BATS Europe, one of our pan-European multilateral trading facilities, or MTFs) and Chi-X Europe (operator of our other pan-European MTF). Together, we refer to our pan-European MTFs as BATS Chi-X Europe. Except as otherwise indicated or 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) gives effect to our reclassification and 4.75-for-1 reverse stock split to be consummated in conjunction with this offering, as described under “Reclassification and Reverse 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 execute the largest notional value of pan-European equities traded by a single market operator through our two MTFs. For the year ended December 31, 2011, we had an 11.3% share of the U.S. equity market and a 3.1% share of the U.S. equity options market. We derived 90.7% of our total revenues from the trading of listed cash equities securities in the United States for the year ended December 31, 2011. In Europe, for the eleven months ended November 30, 2011, we had a 5.7% share of European trading in the securities available for trading on BATS Europe.

On November 30, 2011, we acquired Chi-X Europe, the operator of the largest pan-European MTF. For the eleven months ended November 30, 2011, Chi-X Europe had an 18.4% share of European trading in the securities available for trading on Chi-X Europe. For the month ended December 31, 2011, BATS Chi-X Europe had a 25.4% share of European trading in the securities available for trading on BATS Chi-X Europe, making it the largest pan-European equities trading venue. Pro forma for the acquisition of Chi-X Europe and assuming we had acquired the business on January 1, 2011, for the year ended December 31, 2011 we would have derived 84.1% of our total revenues from the trading of listed cash equities securities in the United States, 5.8% of our total revenues from the trading of listed equity options in the United States and 10.1% of our total revenues from the trading of listed cash equities securities in Europe. We also would have had a 24.1% share of European trading in the securities available for trading on BATS Chi-X Europe during 2011.

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 MTFs operate two displayed books and offer 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 two dark pools.

Our principal objective is to make markets better by minimizing inefficiencies and mitigating trade execution risk for market participants. We minimize inefficiencies in part by offering low-cost, rapid, trade

 

 

1


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execution. For example, during the second half of 2011 our net capture rate in the U.S. equities market was 56% to 68% of the rate reported by NYSE Euronext’s and NASDAQ OMX Group’s U.S. equities operations, while our net capture rate in the European listed equity securities market was approximately 15% of the rate reported by the London Stock Exchange’s European equities operations. During the fourth quarter of 2011, our net capture rate in the U.S. listed equity options market was 25% to 28% of the rate reported by NYSE Arca, NYSE Amex, NASDAQ Options Market and NASDAQ OMX PHLX. We mitigate trade execution risk through offering ultra-low latency order handling through our trading system. In particular, by offering ultra-low latency order handling, our members can very quickly place, modify or cancel orders on our markets. This ability gives our members greater control over their orders, enabling them to rapidly respond to changing market conditions and mitigate trade execution risk. Unlike traditional market operators, we are a technology company at our core. We developed, own and operate the BATS trading platform. With the exception of Chi-X Europe which will be transitioned to our platform during 2012, 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. In March 2008, we decided to enter the European markets by launching an MTF to compete on a pan-European basis against the incumbent securities exchanges, formally launching BATS Europe in October 2008. 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. 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. In November 2011, we acquired Chi-X Europe and it became a wholly-owned subsidiary of BATS Global Markets, Inc. In December 2011, we launched a primary listings business in the United States on BZX.

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 1996, 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.

 

 

2


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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, pursuant to which both sides pay a fee, 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 January 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, pursuant to which both sides of a transaction generally pay a fee to the exchanges, 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 for the years ended December 31, 2010 and 2011, BZX was immediately and automatically accessible 99.999% and 99.940% of the time, respectively. For the year ended December 31, 2011, BYX and BZX (options) were immediately and automatically accessible 99.998% and 99.996% of the time, 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 on BZX, which measures the time that it takes for us to process an order message, has decreased 84.4% from over 930 microseconds in January 2007 to approximately 145 microseconds for the year ended December 31, 2011.

 

  Ø  

For the year ended December 31, 2011, BZX processed approximately 29,000 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. With the exception of Chi-X Europe which will be transitioned to our platform during 2012, we use the same technology platform across all of our markets, so that 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 fewer than 200 employees globally as of

 

 

3


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December 31, 2011, 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, in 2011 we began providing customers who execute a specified minimum volume with more favorable pricing for orders posted on certain of our markets that improve the then current national best bid or best offer for a particular listed equity option or listed cash equity security. 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 fourth quarter of 2010 to 3.0% for the fourth quarter of 2011. To drive market share, we implemented strategic pricing changes in our U.S. Equities segment in July 2011, through which we recognized $14.6 million more in net revenues during the year as a result of an increased net capture rate. These changes included the implementation of a tiered pricing structure that not only contributed to higher market share, but also resulted in a higher net capture rate. Had we implemented this change for the full year and assuming no change in volume, this would have resulted in an incremental $12.1 million more in net revenues. We also made a pricing change in our U.S. Options segment in August 2011 through which we recognized $5.3 million more in net revenues. Had we implemented this change for the full year and assuming no change in volume, this would have resulted in an incremental $6.2 million more in net revenues.

 

   

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;

 

  Ø  

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

 

  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;

 

  Ø  

we executed a definitive agreement to acquire Chi-X Europe in February 2011 and secured approval for the transaction from the U.K. Competition Commission nine months later, allowing us to close the transaction successfully in November 2011; and

 

  Ø  

we received final approval from the SEC of rules necessary to operate a primary listings business in October 2011 and successfully launched our first listings of seven ETFs three months later in January 2012.

 

 

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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 Lime Brokerage and affiliates of Bank of America Merrill Lynch, Citi, Credit Suisse, Deutsche Bank, GETCO, J.P. Morgan, Lehman Brothers, Morgan Stanley and WEDBUSH (on January 1, 2008, Lime Brokerage transferred to Lime Brokerage Holdings LLC and its affiliates all of our Class A common stock owned by Lime Brokerage, and on June 13, 2011, WEDBUSH acquired Lime Brokerage). As a result of investments by affiliates of our strategic investors, 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 for several years, and the majority of our founding employees continue to be employed with us. 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 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, in Europe, we were the first market center to offer a multilateral interoperable clearing service, which provides trading participants with a choice of a preferred clearer from multiple interoperating clearing counterparties, instead of the traditional single clearing counterparty affiliated with a market center. We believe that multilateral interoperable clearing services are significantly reducing clearing costs through competitive clearing in Europe. Also, in December 2011, we launched a primary listings business in the United States, which we expect to be a competitive alternative to the incumbent exchanges. We intend to compete with the other primary listings markets by offering simple and competitive pricing for issuers, innovative mechanisms to promote liquidity and superior customer service, including access to market insight tools. In addition, while we do not currently charge for our

 

 

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primary real-time market data products, in 2010, we began offering new value-added market data products for a fee and continue to explore additional opportunities to offer other market data products for a fee.

 

   

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, foreign exchange, U.S. futures, and other derivative products, and expansion into Brazil and Canada. We are currently a party to 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. Our goal is to enter at least two new markets by the end of 2014.

 

   

Leverage Chi-X Europe Acquisition. We believe that our acquisition of Chi-X Europe, which we completed on November 30, 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 second quarter of 2012. 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, including through registering as an exchange, which we intend to pursue in 2012.

 

   

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, Reclassification and Reverse Stock Split

In conjunction with this offering and before effecting the reverse stock split described below, we intend to reclassify each share of our common stock which has been designated as Voting Common Stock as seven shares of Class A common stock and three shares of Class B common stock and each share of our common stock which has been designated as Non-Voting Common Stock as seven shares of Non-Voting Class A common stock and three shares of Non-Voting Class B common stock. Immediately following such reclassification and at any time thereafter, any share of Class B common stock that is held by a stockholder who, together with such stockholder’s affiliates, owns less than 4,960,491 shares of our common stock (subject to reduction for the reverse stock split as described below), which we refer to as the Class B Threshold, shall, automatically and without any further action, be converted into one share of Class A common stock, and each share of Non-Voting Class B common stock that is held at any time by a stockholder who, together with such stockholder’s affiliates, does not meet the Class B Threshold shall, automatically and without any further action, be converted into one share of Non-Voting Class A common stock. As a result of the reclassification and application of the Class B Threshold, each share of treasury stock held by us will be converted into ten shares of Class A common stock.

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 two and one-half votes per share. Non-Voting Class A common stock and Non-Voting Class B common stock will not be entitled to

 

 

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vote, except as required by applicable law. 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 (provided that approximately 50% of our current stockholders’ Class A common stock and Non-Voting Class A common stock may be transferred 180 days from the completion of this offering to the extent such shares are not included in 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 as described in “Description of Capital Stock—Common Stock—Transfer Restrictions.” 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,” or upon the death of the holder. We also have the option to convert any holder’s Class B common stock or Non-Voting Class B common stock to Class A common stock or Non-Voting Class A common stock, respectively, upon a change of control of such holder. Non-Voting Class A common stock and Non-Voting Class B common stock are convertible into Class A common stock and Class B common stock, respectively, at any time at the option of the holder, and 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 4.75-for-1 reverse 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, and the Class B Threshold will be reduced to 1,044,313.

Immediately prior to this offering and after giving effect to the reclassification, the 4.75-for-1 reverse stock split and the exercise of options to purchase 1,347,290 shares of Class A common stock which are being exercised concurrently with this offering, ten affiliates of our customers, whom we refer to as our strategic investors, collectively owned approximately 27,398,480 shares of our Class A common stock and approximately 11,742,200 shares of our Class B common stock, representing approximately 83.5% of the total voting power of our outstanding capital stock. Upon completion of this offering, our strategic investors will collectively own approximately 24,309,701 shares of our Class A common stock and 11,742,200 shares of Class B common stock, representing approximately 79.0% of the total voting power of our outstanding capital stock. See “Principal and Selling Stockholders.” These strategic investors are affiliates of Bank of America Merrill Lynch, Citi, Credit Suisse, Deutsche Bank, GETCO, Instinet, J.P. Morgan, Morgan Stanley, Tradebot Systems and WEDBUSH.

Risk Factors

Investing in our Class A common stock involves substantial risk. Please read “Risk Factors” beginning on page 17 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;

 

 

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control of us by our strategic investors, who upon completion of this offering will collectively own approximately 79.0% of the total voting power of our outstanding capital stock and, to the extent that they vote similarly, will be able, by virtue of their ability to elect our board of directors, to control our policies and operations and may have interests that differ from those of other stockholders;

 

   

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. LLC, 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(f)(5)(B) of the Conduct Rules of the Financial Industry Regulatory Authority, or FINRA. In addition, Merrill Lynch, Pierce, Fenner & Smith Incorporated and Nomura Securities International, Inc., underwriters of this offering, or their affiliates, will each receive more than 5% of net offering proceeds and will have a “conflict of interest” pursuant to Rule 5121(f)(5)(C)(ii). Accordingly, this offering will be made in compliance with the applicable provisions of Rule 5121. As such, any underwriter that has a conflict of interest pursuant to Rule 5121 will not confirm sales to accounts in which it exercises discretionary authority without the prior written consent of the customer. 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. Raymond James & Associates, Inc. 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.”

Recent Developments

On February 22, 2012, our board of directors approved a cash dividend of $100 million in the aggregate to stockholders of record as of the close of business on the day immediately prior to the closing of this offering as a return of their capital. The dividend is conditioned upon the successful completion of this offering, and purchasers in this offering will not be entitled to the dividend.

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. In July 2009, we incorporated BATS Y-Exchange, Inc. as a subsidiary of BATS Global Markets, Inc. In November 2011, we acquired Chi-X Europe, and it became a wholly-owned subsidiary of BATS Global Markets, Inc. and is 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. batsglobalmarkets.com. Information contained on or accessible from our website is not incorporated by reference into this prospectus.

 

 

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THE OFFERING

 

Class A common stock offered by the selling stockholders

6,296,829 shares

Common stock to be outstanding after this offering:

 

Class A common stock

34,063,009 shares

 

Class B common stock(1)

13,327,780 shares

 

Non-Voting Class A common stock(2)

135,578 shares

 

Non-Voting Class B common stock(1)(2)

119,683 shares

 

Total

47,646,050 shares

 

Over-allotment option

944,524 shares of Class A common stock from one of our selling stockholders, Lehman Brothers Holdings Inc.

 

Voting rights:

 

Class A common stock

One vote per share

 

Class B common stock

Two and one-half 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(3)

 

Class B common stock

Three years

 

Non-Voting Class A common stock

One year(3)

 

Non-Voting Class B common stock

Three years

 

 

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

 

Use of proceeds

We will not receive any proceeds from the sale of our Class A common stock by the selling stockholders in this offering, including any shares sold by one of the selling stockholders in connection with the exercise of the underwriters’ option to purchase additional shares to cover over-allotments. See “Use of Proceeds.”

 

Dividend policy

On February 22, 2012, our board of directors approved a cash dividend of $100 million in the aggregate to stockholders of record as of the close of business on the day immediately prior to the closing of this offering as a return of their capital. The dividend is conditioned upon the successful completion of this offering, and purchasers in this offering will not be entitled to the dividend. We currently plan to retain any future earnings for use in the operation of our business and to fund future growth; therefore, we do not currently intend to pay dividends on our common stock in the foreseeable future. Any future determination to pay dividends will be at the discretion of our board of directors.

 

BZX symbol

BATS

 

(1) 

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, subject to certain exceptions described in “Description of Capital Stock—Common Stock—Conversion,” or upon the death of the holder. In addition, the Class B common stock and Non-Voting Class B common stock will convert into Class A common stock and Non-Voting Class A common stock, respectively, at any time that the holder thereof (together with such holder’s affiliates) owns less than 4,960,491 shares of our common stock (subject to reduction as described in “Reclassification and Reverse Stock Split”). We also have the option to convert any holder’s Class B common stock or Non-Voting Class B common stock to Class A common stock or Non-Voting Class A common stock, respectively, upon a change of control of such holder.

(2) 

The Non-Voting Class A common stock and Non-Voting Class B common stock are convertible into Class A common stock and Class B common stock, respectively, at any time at the option of the holder, and 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” (as defined under “Description of Capital Stock—Ownership and Voting Limits on Our Common Stock”) of the holder.

(3) 

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 pursuant to our amended and restated certificate of incorporation (provided that approximately 50% of our current stockholders’ Class A common stock and Non-Voting Class A common stock may be transferred 180 days from the completion of this offering to the extent such shares are not included in this offering).

 

 

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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 December 31, 2011, giving effect to the Chi-X Europe acquisition and our reclassification and 4.75-for-1 reverse stock split to be consummated in conjunction with this offering, as described under “Reclassification and Reverse Stock Split,” and the exercise of options to purchase 1,347,290 shares of Class A common stock which are being exercised concurrently with this offering, but excluding:

 

   

2,030,604 shares of Class A common stock issuable upon the exercise of outstanding stock options, which represents stock options outstanding as of December 31, 2011 of 3,377,894 with a weighted average exercise price of $13.40 per share less the 1,347,290 stock options being exercised concurrently with this offering; and

 

   

an aggregate of 104,562 shares of Class A common stock reserved for future issuance under our stock option plans as of December 31, 2011.

Unless otherwise indicated, all information in this prospectus assumes that the underwriters do not exercise their over-allotment option to purchase up to 944,524 additional shares of Class A common stock from one of the selling stockholders named herein 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, 2011, 2010 and 2009 and the statement of financial condition data as of December 31, 2011 and 2010 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, 2009 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, 2011 from the unaudited pro forma condensed combined statement of operations and related notes included in this prospectus. The unaudited pro forma condensed combined statement of operations is intended to provide information about how the Chi-X Europe acquisition might have affected our historical statement of operations if it had been consummated as of January 1, 2011. The following unaudited pro forma condensed combined statement of operations is provided for informational purposes only and does not necessarily reflect the results of operations that would have actually resulted had the Chi-X Europe acquisition occurred as of January 1, 2011, nor should it be taken as necessarily indicative of our future results of operations.

 

     Year Ended December 31,  
     Pro  Forma
2011(2)
     2011      2010      2009  
     (in millions, except share and per share
data)
 

Consolidated Statements of Operations Data:

           

Revenues:

           

Transaction fees

   $ 768.3       $ 695.4       $ 668.3       $ 730.1   

Market data fees

     55.4         55.4         46.0         50.7   

Regulatory transaction fees(1)

     156.4         156.4         111.0         125.0   

Other

     19.4         19.4         9.5         2.4   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total revenues

     999.5         926.6         834.8         908.2   

Cost of revenues:

           

Liquidity payments

     610.7         566.1         541.7         618.2   

Routing, clearing and other fees

     76.1         76.1         82.9         86.1   

Section 31 fees(1)

     156.4         156.4         111.0         125.0   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total cost of revenues

     843.2         798.6         735.6         829.3   
  

 

 

    

 

 

    

 

 

    

 

 

 

Revenues less cost of revenues

     156.3         128.0         99.2         78.9   

Operating expenses:

           

Compensation and benefits

     62.2         42.9         30.6         25.1   

Other operating expenses

     53.2         46.8         33.8         23.5   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total operating expenses

     115.4         89.7         64.4         48.6   

Operating income

     40.9         38.3         34.8         30.3   

Interest and investment income and other income

     0.2         —           0.2         0.2   
  

 

 

    

 

 

    

 

 

    

 

 

 

Income before income tax provision

     41.1         38.3         35.0         30.5   

Income tax provision

     16.8         14.8         15.2         6.0   
  

 

 

    

 

 

    

 

 

    

 

 

 

Net income

   $ 24.3       $ 23.5       $ 19.8       $ 24.5   
  

 

 

    

 

 

    

 

 

    

 

 

 

Earnings per share:

           

Basic

   $ 1.09       $ 1.29       $ 1.11       $ 1.38   

Diluted

   $ 1.07       $ 1.26       $ 1.08       $ 1.35   

 

 

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     Year Ended December 31,  
     Pro  Forma
2011(2)
     2011      2010      2009  
     (in millions, except share and per share data)  

Pro forma earnings per share(3):

           

Basic

   $ 0.52       $ 0.61         

Diluted

   $ 0.51       $ 0.60         

Weighted average common shares:

           

Basic

     22,214,286         18,229,825         17,814,233         17,741,333   

Diluted

     22,729,740         18,745,279         18,303,412         18,175,746   

Pro forma weighted average common shares:

           

Basic

     46,766,918         38,378,579         

Diluted

     47,852,084         39,463,745         

 

(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) 

Represents the effects of the acquisition of Chi-X Europe as if the acquisition had occurred on January 1, 2011. All acquisition related costs directly attributable to the transaction, such as fees to investment bankers, attorneys, accountants and other professional advisors and severance to employees, of $18.8 million are reflected as pro forma adjustments to derive pro forma net income. The pro forma adjustments do not reflect any cost savings or synergies we expect to realize after we integrate Chi-X Europe’s operations. Once Chi-X Europe is fully integrated, we anticipate realizing annual cost efficiencies of approximately $8 million to $11 million as a result of savings from the consolidation of technology, operations and occupancy costs. We also expect to incur approximately $5.1 million in additional compensation and benefits expense in 2012 in connection with severance and retention payments related to Chi-X Europe employees.

(3) 

Gives pro forma effect to the Chi-X Europe acquisition, our reclassification and 4.75-for-1 reverse stock split to be consummated in conjunction with this offering and the exercise of options to purchase 1,347,290 shares of Class A common stock which are being exercised concurrently with this offering.

 

     As of December 31,  
     2011      2010      2009  
     (in millions)  

Consolidated Statement of Financial Condition Data:

        

Cash and cash equivalents

   $ 99.4       $ 150.0       $ 107.7   

Short-term and financial investments

     154.8         27.3         55.0   

Total assets

     594.9         256.5         239.0   

Stockholders’ equity

     446.6         198.7         172.8   

 

 

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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. The European Equities segment also includes the equity transactions that have occurred on the Chi-X Europe trading platform since December 1, 2011, following the acquisition of Chi-X Europe on November 30, 2011. We 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,  
     2011     2010     2009  
     (in millions except for trading days,
percentages, members/participants,
latency and headcount)
 

U.S. Equities:

      

Average daily volume (ADV):

      

Matched shares

     920.3        888.1        1,024.6   

Routed shares

     106.5        134.9        148.8   
  

 

 

   

 

 

   

 

 

 

Total shares

     1,026.8        1,023.0        1,173.4   
  

 

 

   

 

 

   

 

 

 

Number of trading days

     252        252        252   

Net capture per one hundred touched shares(1)

   $ 0.017      $ 0.014      $ 0.008   

Market share(2)(3)

     11.3     10.2     10.5

European Equities:

      

Average daily notional value (ADNV):

      

Matched notional value

   2,629.4      1,953.2      731.0   

Routed notional value

   66.2      30.7        —     

Average daily volume (ADV):

      

Total shares (matched and routed)

     319.4        268.0        105.3   

Number of trading days

     257        258        257   

Net capture per matched notional value(1)

     0.0011     0.0010     0.0004

Market share(3)

     6.8 %(4)      5.5     2.7

U.S. Options:

      

Total volume:

      

Matched contracts

     136.3        15.1        —     

Routed contracts

     12.0        10.0        —     
  

 

 

   

 

 

   

 

 

 

Total contracts

     148.3        25.1        —     
  

 

 

   

 

 

   

 

 

 

Number of trading days

     252        215     

Net capture per touched contract(1)

   $ (0.010   $ 0.019        —     

Market share(3)

     3.1     0.5 %(5)      —     

Other Data:

      

EBITDA(6)

   $ 46.6      $ 41.2      $ 34.8   

EBITDA margin(7)

     36.4     41.6     44.1

Normalized EBITDA(6)

   $ 60.3      $ 42.4      $ 34.8   
  

 

 

   

 

 

   

 

 

 

Normalized EBITDA margin(8)

     47.1     42.8     44.1

Pro Forma EBITDA(6)

   $ 63.7        *        *   

Pro Forma EBITDA margin(9)

     49.8     *        *   

Operating income as a percentage of revenues less cost of revenues

     29.9     35.1     38.4

Capital expenditures

   $ 9.6      $ 6.4      $ 5.7   

Members/participants (as of period end):

      

BZX

     384        387        382   

BYX

     237        202        —     

U.S. Options

     74        60        —     

BATS Chi-X Europe

     145        88        74   

Up-time percentage(10)

     99.940     99.999     99.947

BZX latency(11)

     145.2        164.4        247.0   

Employee headcount

     170        110        97   

 

 

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* Not meaningful.
(1) 

Please see the glossary for our definitions of “net capture per one hundred touched shares,” “net capture per matched notional value” and “net capture per touched contract.”

(2) 

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

(3) 

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

(4) 

Represents BATS Chi-X Europe market share (11 months, from January 1, 2011 until November 30, 2011, of BATS Europe market share and the one month ended December 31, 2011 of combined BATS Chi-X Europe market share, as the Chi-X Europe acquisition was completed on November 30, 2011). Had we completed the Chi-X Europe acquisition on January 1, 2011, our combined pro forma market share for the year ended December 31, 2011 would have been 24.1%.

(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. Normalized EBITDA is defined as EBITDA before Chi-X Europe acquisition costs and initial public offering, or IPO, costs. Pro Forma EBITDA is defined as EBITDA before Chi-X Europe acquisition costs, had the Chi-X Europe acquisition been completed on January 1, 2011. EBITDA, Normalized EBITDA and Pro Forma 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, Normalized EBITDA and Pro Forma 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, Normalized EBITDA and Pro Forma EBITDA differently than we do. EBITDA, Normalized EBITDA and Pro Forma 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.

The following is a reconciliation of net income to EBITDA, Normalized EBITDA and Pro Forma EBITDA:

 

    Year Ended December 31,  
        2011             2010             2009      
    (in millions)  

Net income

  $ 23.5      $ 19.8      $ 24.5   

Interest

    (0.1     (0.3     (0.5

Income tax provision

    14.8        15.2        6.0   

Depreciation and amortization

    8.4        6.5        4.8   
 

 

 

   

 

 

   

 

 

 

EBITDA

    46.6        41.2        34.8   

BATS Chi-X Europe acquisition costs

    11.4        —          —     

IPO costs

    2.3        1.2        —     
 

 

 

   

 

 

   

 

 

 

Normalized EBITDA

  $ 60.3      $ 42.4      $ 34.8   
 

 

 

   

 

 

   

 

 

 

 

     Year Ended
December 31, 2011
 
     (in millions)  

Pro forma net income

     $24.3   

Pro forma interest

     (0.3

Pro forma income tax provision

     16.8   

Pro forma depreciation and amortization

     16.9   

BATS Chi-X Europe acquisition costs(12)

     1.1   

Chi-X Europe (historical) acquisition costs(13)

     4.9   
  

 

 

 

Pro Forma EBITDA

   $ 63.7   
  

 

 

 
(7) 

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

(8) 

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

(9) 

Pro Forma EBITDA margin represents Pro Forma EBITDA divided by pro forma revenues less pro forma cost of revenues.

(10) 

“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.

 

 

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(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) 

All acquisition related costs directly attributable to the transaction, such as fees to investment bankers, attorneys, accountants and other professional advisors and severance to employees, of $10.3 million are reflected as pro forma adjustments to derive pro forma net income. Expenses related to retention payments to employees of $1.1 million were not reflected in pro forma net income as these expenses are not directly attributable to the transaction.

(13) 

All acquisition related costs directly attributable to the transaction, such as fees to investment bankers, attorneys, accountants and other professional advisors and severance to employees, of $8.5 million are reflected as pro forma adjustments to derive pro forma net income. Expenses related to retention payments to employees of $4.9 million were not reflected in pro forma net income as these expenses are not directly attributable to the transaction.

 

 

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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. Unlike “lit” venues that publicly display orders, dark pools do not display orders publicly or privately. In addition, while dark pools are required to publicly report trade executions, unlike lit venues that are national securities exchanges, such as BZX and BYX, those public reports do not identify the dark pool responsible for the trade execution. Hence, dark pools are less transparent than lit venues. Moreover, dark pools below a certain size have discretion to offer access on discriminatory terms, effectively blocking access to certain types of market participants. These features of dark pools can appeal to trading participants who seek to minimize the public disclosure of their trading interest or limit the types of other trading participants that can access their orders. 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, for the year ended December 31, 2011, 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. 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 December 31, 2011 vying for market share, and is in the midst of significant change, driven primarily by recent regulatory changes. Our primary competitors in the options market are the Chicago Board Options Exchange, or 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 CBOE (for example, products based on the VIX volatility index) represent products that

 

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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 allow them to potentially appeal to a broader customer base.

In recent years, the securities trading industry has witnessed increased consolidation among market participants. Though many recent attempts to consolidate further have failed, 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 Chi-X Europe and, therefore, lead to decreased revenues. In addition, consolidations or alliances among our current competitors may achieve cost reductions or other increases in efficiency, which may allow our competitors to offer lower prices or better customer service than we do. 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.

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.

We may face competition from our strategic investors.

Our strategic investors or their affiliates may already have or may acquire an ownership interest in competing businesses (including national securities exchanges, dark pools, MTFs, ATSs or ECNs). These businesses may compete with us, either in relation to existing product and service offerings or any diversification of our product and service offerings into new asset classes and/or new geographic locations. For example, certain of our strategic investors have a material interest in another MTF, Turquoise. Furthermore, many of our strategic investors operate market-making desks, dark pools, “lit” ATSs and ECNs and smart order routers, each of which potentially competes with us.

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 43.3% and 41.6% of our revenues less cost of revenues from market data fees and net transaction fees, respectively, for the year ended December 31, 2011. 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 Chi-X Europe, whether a trade is executed internally on BZX, BYX or BATS Chi-X 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 Chi-X 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 Chi-X Europe or notional value traded on BATS Chi-X Europe decreases, we will lose transaction fees. Moreover, market data fees could decline as a result of a reduction in the numbers of

 

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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.

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 also 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.

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. Similarly, in the first quarter of 2011, we experienced a period of high trading volume and volatility due to a natural disaster affecting Japan and the escalation of conflict in the Middle East, and, in the third quarter of 2011, we experienced a period of high trading volume and volatility due to the sovereign debt crisis in Europe. More generally, the U.S. listed cash equity market has seen a decline in trading volume for the past three years, with the market ADV falling approximately 19% from 2009 to 2011. In addition, other events may affect overall market volume on a sustained basis, including Citi’s reverse stock split in the second quarter of 2011 and rule-making under the Dodd-Frank Wall Street Reform and Consumer Protection Act, or Dodd Frank, such as the provision commonly known as the Volcker Rule that restricts banking entities from engaging in certain kinds of proprietary trading. Accordingly, we may face a decline in our 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 other pricing actions.

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, 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

 

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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 18, 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 sought public comment regarding various issues, including co-location, high frequency trading and a potential “trade-at” rule. 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. In addition, any new regulations that impose mandatory quoting obligations, such as a requirement to maintain quotes at or near the national best bid or offer a certain percentage of the time or limitations on the number or rate of quotation updates could increase trading risk for market participants deploying high frequency trading strategies and, consequently, 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 two years 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.

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 Commission has issued a consultation paper on the review of the Markets in Financial Instruments Directive, or MiFID, and issued proposals in October 2011. The negotiation of legislation, known as MiFID 2, has begun on the basis of these proposals. This effort could result in an alteration of the MiFID

 

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structure that has encouraged competition among market centers in Europe. The results of MiFID 2 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. In addition, in September 2011, the European Commission put forward a proposal for a financial transaction tax in the European Union from January 1, 2014. Several European Union member states, including Germany and France, have announced their support for the proposal. France has also proposed a French financial transaction tax. There is a possibility that such a tax could gain further 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 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.

 

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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 team of technology professionals, many of whom have been with us for several years, 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 and regulatory requirements. If our platform fails to function as expected, our business would 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, customer preferences and regulatory requirements 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, compete successfully by further diversifying our product and service offerings or meet regulatory requirements.

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 the years 2011, 2010 and 2009, 29.4%, 31.7% and 29.8% of our total revenues, respectively, were generated by affiliates of our strategic investors. None of our strategic investors accounted for more than 10% of our total revenues during the years 2011, 2010 or 2009. In addition, affiliates of our strategic investors also provide us with liquidity for which we provide them with a rebate. For the years 2011, 2010 and 2009, 31.3%, 41.8% and 53.7% of our total cost of revenues, respectively, were generated by affiliates of our strategic investors . For the years 2011, 2010 and 2009, an affiliate of one of our strategic investors accounted for 13.2%, 31.0% and 51.0%,

 

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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 combining 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:

 

   

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

 

   

transitioning Chi-X Europe to our trading platform;

 

   

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 BATS 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;

 

   

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 of 2002, which we refer to as 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.

In addition, as mentioned above the concept of a transaction tax has gained support from the European Parliament in the form of a non-binding resolution and, in September 2011, the European Commission put forward a proposal for a financial transaction tax in the European Union from January 1, 2014. Several European Union member states, including Germany and France, have announced their support for the proposal. France has also proposed a French financial transaction tax. There is a possibility that such a tax could gain further support, particularly in Europe, in which case it would likely raise trading costs and reduce transaction volumes and adversely effect the combined business.

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

 

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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, as a result of 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 pro forma basis should not be viewed as indicative of our combined future volume.

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 within 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;

 

   

failure to obtain necessary financing on acceptable terms; or

 

   

acquisition-related litigation.

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.

If our goodwill or intangible assets become impaired we may be required to record a significant charge to earnings.

As a result of our acquisition of Chi-X Europe on November 30, 2011, we have recorded approximately $249.4 million of goodwill and other acquired 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.

 

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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. For example, we are responsible for identifying possible violations of the securities laws by our members and taking regulatory action against those members if such violations are confirmed. We could be conflicted in pursuing such regulatory actions against our customers because to do so could result in a loss of trading volumes on our markets. 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, the LCH.Clearnet Group, European Central Counterparty Limited, or EuroCCP, SIX x-clear AG, or x-clear; 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 of communications and networking products and services.

We also rely on third-party broker-dealers for routing and clearing services in certain circumstances. Specifically, we may route an order from a customer away from our markets to another trading venue if there is

 

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insufficient liquidity on our markets to match the order and/or if the customer is utilizing one of our smart-order routing strategies. We may use a third-party broker-dealer to establish backup connectivity to another exchange in the event that our connection to such exchange fails, because we do not have a direct connection to such exchange or to take advantage of tiered pricing rates at such exchange. Once we (or such third-party) fill an order on another market, the executed trade is sent to a clearing broker to match the details of the trade with the clearing broker for the other party to the trade. We rely on Bank of America Merrill Lynch, Citi, Morgan Stanley, Wedbush Securities and affiliates of Citi, Morgan Stanley, Credit Suisse and Lime Brokerage, each of which is an affiliate of one of our strategic investors, to route orders that are not routed directly by us and to clear certain trades routed to other markets.

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 CBOE to perform certain regulatory functions on our behalf pursuant to a regulatory services agreement, or RSA, which we entered into in 2011. Prior to entering into an RSA with CBOE, we maintained an RSA for these same services with FINRA. In conjunction with the transition to the CBOE RSA, FINRA continues to provide some services to us under the former RSA, such as completing examinations and investigations that were in process when we executed an RSA with CBOE. Under both RSAs, we maintain ultimate responsibility for the regulatory activities.

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 failure to perform on the part of our clearing firms, Wedbush Securities or Morgan Stanley. Wedbush Securities and Morgan Stanley guarantee trades until one day after the trade date, after which time NSCC provides a guarantee. Thus, BATS Trading is potentially exposed to credit risk to the counterparty to a trade routed to another market center between the trade date and one day after the trade date in the event that Wedbush Securities or Morgan Stanley fails to perform. 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.

 

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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 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 or other pricing actions. In particular, overall market volume for our U.S. Equities segment decreased in 2011 from 2010, as well as in 2010 from 2009, as a result of the uncertain economic climate, reduced volumes and decreased volatility.

In Europe, countries such as Portugal, Ireland, Italy, 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;

 

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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.

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. For example, in December 2011, we experienced a hardware failure resulting in an outage at our primary data center in Slough, England, which lasted for nearly half the trading day. As a result of the outage, we ceased trading until the following day. To minimize the likelihood of this occurring in the future, we have worked closely with the vendor of the system component that caused the outage to ensure that the latest software is and will continue to be deployed on this system component. In addition, we have enhanced our London-based disaster recovery site to provide a live backup site for both BATS Europe and Chi-X Europe should a severe system failure occur in the future. There can be no assurance that these measures will prevent future outages.

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.

 

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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 three 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.

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

 

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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. For example, SROs such as BZX and BYX are required by federal law to perform a variety of functions that would otherwise be performed by a governmental agency. As such, and similar to sovereign immunity accorded to governments, U.S. federal courts have held that SROs are immune from civil damages for conduct undertaken as part of their statutorily delegated adjudicatory, regulatory and prosecutorial authority. This immunity, however, 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. As a result, we could be subject to investigations and judicial or administrative proceedings that result in substantial penalties if we were found to be out of compliance with our obligations under the federal securities laws. Any such liability or penalties could have a material adverse effect on our business.

We have from time to time received inquiries and investigative requests from the SEC’s Office of Compliance Inspections and Examinations as well as the SEC’s Division of Enforcement seeking information about our and our members’ compliance with the federal securities laws. We recently received a written request from the SEC’s Division of Enforcement seeking documents and information related to the development, modification and use of order types, and our communications with certain market participants (including certain of our members affiliated with certain of our stockholders and directors) regarding the development, modification and use of order types; our information technology systems; and trading strategies. The investigation is in the early stages and we are cooperating with the staff.

An investigation, inquiry or related publicity could impair our reputation and damage our brand name, particularly with our members and other market participants. This could result in a decrease of our share of total trading volumes relative to our competitors, which may make us less attractive to market participants as a source of liquidity and cause us to lose additional trading volume and associated fees, which would adversely affect our business, reputation, financial condition and operating results.

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. In addition, we face increased litigation risk as a result of the Chi-X Europe acquisition.

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

 

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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 and 2011. 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 and regulatory initiatives;

 

   

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

 

   

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 relationships with CBOE and FINRA;

 

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

 

   

any negative publicity surrounding our listed companies.

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 as a result of our acquisition of Chi-X Europe, we have significantly increased 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 as a result of the completion of the Chi-X Europe acquisition, this currency risk exposure has increased. 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 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 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.

 

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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 24,309,701 shares of our Class A common stock and 11,742,200 shares of Class B common stock, representing approximately 79.0% 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, without limitation, 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;

 

   

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

 

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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 our strategic investors are underwriters of this offering, and 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.

Each of Morgan Stanley & Co. LLC, Citigroup Global Markets Inc., Credit Suisse Securities (USA) LLC, Deutsche Bank Securities Inc., Wedbush Securities Inc., J.P. Morgan Securities LLC, Merrill Lynch, Pierce, Fenner & Smith Incorporated and Nomura Securities International, Inc., who are underwriters of this offering, is an affiliate of one of our strategic investors. 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 (e.g., to maximize the value of their investment) and their respective interests as underwriters (e.g., in negotiating the initial public offering price) as well as your interest as a purchaser. As affiliates of participants in this offering that may seek to realize the value of their investment in us, these underwriters could have interests beyond customary underwriting discounts and commissions. See “Certain Relationships and Related Transactions—Underwriters.” Morgan Stanley & Co. LLC, 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(f)(5)(B) of the Conduct Rules of FINRA. In addition, Merrill Lynch, Pierce, Fenner & Smith Incorporated and Nomura Securities International, Inc., underwriters of this offering, or their affiliates, will each receive more than 5% of net offering proceeds and will have a “conflict of interest” pursuant to Rule 5121(f)(5)(C)(ii). 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. Raymond James & Associates, Inc. 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. Although the qualified independent underwriter has participated in the preparation of the prospectus and conducted due diligence, we cannot assure you that this will adequately address any potential conflicts of interest. See “Underwriters.”

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.

 

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Upon completion of this offering, there will be 34,063,009 shares of Class A common stock, 135,578 shares of Non-Voting Class A common stock, 13,327,780 shares of Class B common stock and 119,683 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 180-day or one-year restriction on transfer. Of these shares, 27,766,180 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.”

In addition to outstanding shares eligible for sale, upon consummation of this offering approximately 2,030,604 shares of our Class A common stock will be issuable upon exercise 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 24,309,701 shares of our Class A common stock and 11,742,200 shares of Class B common stock, representing approximately 79.0% 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 December 31, 2011, after giving effect to the reclassification, reverse stock split and the exercise of options to purchase 1,347,290 shares of Class A common stock which are being exercised concurrently with this offering, 2,030,604 shares of Class A common stock were issuable upon the exercise of outstanding stock options, and an aggregate of 104,562 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 4.75-for-1 reverse stock split, 10,000,000 shares of preferred stock and 125,000,000 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.

 

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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 will 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 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.

Except for a cash dividend of $100 million in the aggregate to stockholders on record as of the close of business on the day immediately prior to the closing of this offering that was approved by our board of directors on February 22, 2012, 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 November 30, 2011, we acquired 100% of the outstanding stock of Chi-X Europe, for which Chi-X Europe’s shareholders received, in the aggregate, approximately 4.4 million newly issued shares of our common stock (consisting of 4,177,853 shares of our Voting Common Stock and 189,500 shares of our Non-Voting Common Stock) and approximately $32.3 million in cash. The 4.4 million newly issued shares represented 19.5% of our outstanding shares as of December 31, 2011 (before giving effect to this offering and the related reclassification, 4.75-for-1 reverse stock split and the exercise of options to purchase 1,347,290 shares of Class A common stock which are being exercised concurrently with this offering). 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 fourth quarter of 2012 if one of the following market-share benchmarks is met in the six-month period beginning on June 1, 2012: (1) a benchmark market share of less than 22% (which would result in no contingent consideration payment) or (2) 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 (3) a benchmark market share of 25% or more (which would result in a $65 million payment). For the month ended December 31, 2011, BATS Chi-X Europe had an approximately 25.9% of benchmark market share.

As of the November 30, 2011 acquisition date, Chi-X Europe’s assets, liabilities and operations, including amortization and depreciation expenses, are reported under our European Equities segment. As a result of the acquisition, we recorded goodwill of $187.1 million that will be assessed annually in the fourth quarter for impairment under ASC 350—Intangibles—Goodwill and Other. We also recorded $62.3 million in identifiable intangible assets, which will result in approximately $6.6 million in amortization expense in 2012. In addition, we recorded 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 during 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. During 2011, we recorded a $300,000 charge related to changes to fair value of contingent consideration. In addition, we incurred acquisition related costs of approximately $11.4 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 second quarter of 2012. 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. Once Chi-X Europe is fully integrated, we anticipate realizing annual cost efficiencies of approximately $8 million to $11 million as a result of savings from the consolidation of technology, operations and occupancy costs. We also expect to incur approximately $5.1 million in additional compensation and benefits expense in 2012 in connection with severance and retention payments related to Chi-X Europe employees.

Overview of Chi-X Europe

Chi-X Europe is headquartered in London. For the eleven months ended November 30, 2011, it operated the largest pan-European MTF with an 18.4% 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 and 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. We currently intend 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, 2011. An unaudited pro forma statement of financial condition as of December 31, 2011 is not presented, as Chi-X Europe’s statement of financial condition, including related acquisition adjustments, has already been included in our consolidated statement of financial condition and accompanying notes as of December 31, 2011 included elsewhere in this prospectus.

The following unaudited pro forma condensed financial data is provided for informational purposes only and does 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, 2011 (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

   $ 695.4      $ 72.9      $ —        $ 768.3   

Market data fees

     55.4        —          —          55.4   

Regulatory transaction fees(3)

     156.4        —          —          156.4   

Other

     19.4        —          —          19.4   
  

 

 

   

 

 

   

 

 

   

 

 

 

Total revenues

     926.6        72.9        —          999.5   

Cost of revenues:

      

Liquidity payments

     566.1        44.6        —          610.7   

Routing and clearing

     76.0        —          —          76.0   

Section 31 fees(3)

     156.4        —          —          156.4   

Other

     0.1        —          —          0.1   
  

 

 

   

 

 

   

 

 

   

 

 

 

Total cost of revenues

     798.6        44.6        —          843.2   
  

 

 

   

 

 

   

 

 

   

 

 

 

Revenues less cost of revenues

     128.0        28.3        —          156.3   

Operating expenses:

      

Compensation and benefits

     42.9        19.3        —          62.2   

Depreciation and amortization

     8.4        1.9        6.6 (4)      16.9   

General and administrative

     38.4        16.7        (18.8 )(5)      36.3   
  

 

 

   

 

 

   

 

 

   

 

 

 

Total operating expenses

     89.7        37.9        (12.2     115.4   
  

 

 

   

 

 

   

 

 

   

 

 

 

Operating income (loss)

     38.3        (9.6     12.2        40.9   

Interest and investment income

     0.1        0.3        (0.1 )(6)      0.3   

Other expense

     (0.1     —          —          (0.1
  

 

 

   

 

 

   

 

 

   

 

 

 

Income (loss) before income tax provision

     38.3        (9.3     12.1        41.1   

Income tax provision (benefit)

     14.8        —          2.0 (7)      16.8   
  

 

 

   

 

 

   

 

 

   

 

 

 

Net income (loss)

   $ 23.5      $ (9.3   $ 10.1      $ 24.3   
  

 

 

   

 

 

   

 

 

   

 

 

 

Earnings per share:

        

Basic

   $ 1.29          *      $ 1.09   

Diluted

   $ 1.26          *      $ 1.07   

Pro forma earnings per share(9):

        

Basic

   $ 0.61          *      $ 0.52   

Diluted

   $ 0.60          *      $ 0.51   

 

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     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)  

Weighted average common shares:

          

Basic

     18,229,825            —   (8)      22,214,286   

Diluted

     18,745,279            —   (8)      22,729,740   

Pro forma weighted average common shares:

          

Basic

     38,378,579            —   (8)      46,766,918   

Diluted

     39,463,745            —   (8)      47,852,084   

 

* Not meaningful.
(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 Period From January 1, 2011 through November 30, 2011.”

(2) 

Represents the effects of the acquisition of Chi-X Europe as if the acquisition had occurred on January 1, 2011. The pro forma adjustments also do not reflect any cost savings or synergies we expect to realize after we integrate Chi-X Europe’s operations. Once Chi-X Europe is fully integrated, we anticipate realizing annual cost efficiencies of approximately $8 million to $11 million as a result of savings from the consolidation of technology, operations and occupancy costs. We also expect to incur approximately $5.1 million in additional compensation and benefits expense in 2012 in connection with severance and retention payments related to Chi-X Europe employees.

(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 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 acquired intangible assets, except the license and registration, which we have determined to have an indefinite life. The discounted cash flow method for the customer relationship and trade name assets will result in a decrease in amortization expense over their respective useful lives to match the economic benefit expected from these assets. The discounted cash flow method for the strategic alliance agreement will result in an increase in amortization expense over its useful life to match the economic benefit expected from this agreement.

(5) 

Represents all acquisition related costs, such as fees to investment bankers, attorneys, accountants and other professional advisors and severance to employees, of $10.3 million and $8.5 million for us and Chi-X Europe, respectively, for the year ended December 31, 2011. Expenses related to retention payments to employees of $1.1 million and $4.9 million for us and Chi-X Europe, respectively, were not reflected in the pro forma adjustments as these expenses are not directly attributable to the transaction.

(6) 

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

(7) 

Represents the tax provision of the transaction-related expenses, net of the tax benefits from the amortization of intangible assets acquired and the loss before income taxes for the period from January 1, 2011 through November 30, 2011 for Chi-X Europe.

(8) 

No adjustment to weighted average outstanding shares is necessary, as these values are for the year ended December 31, 2011 and include adjustments made for the shares issued for the acquisition of Chi-X Europe.

(9)

Gives pro forma effect to the Chi-X Europe acquisition, our reclassification and 4.75-for-1 reverse stock split to be consummated in conjunction with this offering and the exercise of options to purchase 1,347,290 shares of Class A common stock which are being exercised concurrently with this offering.

 

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Notes to the Unaudited Pro Forma

Condensed Combined Statement of Operations

(unaudited)

 

1. Basis of Presentation

The acquisition of Chi-X Europe is accounted for under the acquisition method of accounting in accordance with ASC Topic 805-10, “Business Combinations—Overall,” or ASC 805-10. We have accounted for the transaction by using our historical information and accounting policies and adding the assets and liabilities of Chi-X Europe as of the acquisition date at their respective fair values. Pursuant to ASC 805-10, under the acquisition method, the total purchase price (consideration transferred), as described in Note 3, Purchase Price Allocation, is measured at the acquisition closing date. The assets and liabilities of Chi-X Europe have been measured based on various estimates and valuations using assumptions that our management believes are reasonable utilizing information currently available. Use of different estimates and judgments could yield different results.

The process for estimating the fair values of identifiable intangible assets and certain tangible assets requires the use of significant estimates and assumptions, including estimating future cash flows and developing appropriate discount rates. The excess of the purchase price (consideration transferred) over the estimated amounts of identifiable assets and liabilities of Chi-X Europe as of the effective date of the acquisition was allocated to goodwill in accordance with ASC 805-10.

Under ASC 805-10, acquisition-related transaction costs (e.g., investment banker, advisory, legal, valuation, and other professional fees) are not included as a component of consideration transferred but are required to be expensed as incurred.

 

2. Accounting Policies

Upon completion of the acquisition, we reviewed Chi-X Europe’s accounting policies and identified differences between the accounting policies of the two companies. The unaudited pro forma condensed combined statement of operations reflects adjustments to conform Chi-X Europe’s results 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.

 

3. Purchase Price Allocation

The acquisition-date fair value of the consideration transferred totaled $304.2 million, which consisted of the following:

 

     Consideration (in millions)  

Cash paid at closing

   $ 32.3   

4,367,353 shares of our common stock

     219.6 (1) 

Fair value of contingent cash payment

     52.3 (2) 
  

 

 

 

Total consideration to Chi-X Europe shareholders

   $ 304.2   
  

 

 

 

 

(1) 

Based on a third-party valuation as of November 30, 2011.

(2) 

The contingent cash payment of $0, $30 million or $65 million will be paid to Chi-X Europe’s shareholders in the fourth quarter of 2012. Consistent with Accounting Standards Codification, or ASC, 805—Business Combinations, we estimated the fair value of the contingent consideration based on an evaluation of alternative scenarios relating to our and Chi-X Europe’s combined business and the benchmark market share under each scenario, the likelihood of each scenario and the amount of the contingent consideration payable

 

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  under each scenario. The evaluation of these factors resulted in a probability-weighted forecast of the contingent consideration, which was then discounted to present value using an appropriate discount rate that reflects the risk associated with the cash flows. The sum of the present value of the contingent payment amounts represented our estimate of the fair value of the contingent consideration.

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 their respective fair values as of the acquisition date as determined by us and a third-party valuation firm. The 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 relationships

   $ 45.1        20   

Trademarks and trade names

     0.6        1   

Strategic alliance agreement

     5.8        4.25   

Licenses and registration

     10.8        Infinite   
  

 

 

   

Total acquired intangible assets

     62.3     

Goodwill

     187.1     
  

 

 

   

Total intangible assets

     249.4     

Current assets

     58.6     

Non-current assets

     0.3     

Property and equipment

     5.2     

Liabilities

     (9.3  
  

 

 

   

Total cost of acquisition

   $ 304.2     
  

 

 

   

Of the total purchase price, approximately $54.8 million has been allocated to net tangible assets and working capital acquired, and approximately $51.5 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.

Of the total estimated purchase price, approximately $187.1 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 ASC 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.

 

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4. IFRS to U.S. GAAP Adjustments

The following table shows a reconciliation of the unaudited historical profit and loss accounts for the eleven months ended November 30, 2011, prepared in accordance with IFRS and in British pounds, to the statement of operations under U.S. GAAP and in U.S. dollars included in the unaudited pro forma condensed combined statement of operations.

Statement of Operations

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

Conversion from British Pounds to U.S. Dollars

For the Period from January 1, 2011 through November 30, 2011

 

     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

   £ 46.7      £ —        £ 46.7        1.560       $ 72.9   
  

 

 

   

 

 

   

 

 

      

 

 

 

Total revenues

     46.7        —          46.7           72.9   

Cost of revenues:

           

Liquidity payments

     28.6        —          28.6        1.560         44.6   
  

 

 

   

 

 

   

 

 

      

 

 

 

Total cost of revenues

     28.6        —          28.6           44.6   
  

 

 

   

 

 

   

 

 

      

 

 

 

Revenues less cost of revenues

     18.1        —          18.1           28.3   

Operating Expenses:

           

Compensation and benefits

     12.4        —          12.4        1.560         19.3   

Depreciation and amortization

     1.1        0.1 (3)      1.2        1.560         1.9   

General and administrative

     10.8        (0.1 )(3)      10.7        1.560         16.7   
  

 

 

   

 

 

   

 

 

      

 

 

 

Total operating expenses

     24.3        —          24.3           37.9   
  

 

 

   

 

 

   

 

 

      

 

 

 

Operating loss

     (6.2     —          (6.2        (9.6

Interest and investment income

     0.2        —          0.2        1.560         0.3   
  

 

 

   

 

 

   

 

 

      

 

 

 

Loss before income tax provision

     (6.0     —          (6.0        (9.3
  

 

 

   

 

 

   

 

 

      

 

 

 

Net loss

   £ (6.0   £ —        £ (6.0      $ (9.3
  

 

 

   

 

 

   

 

 

      

 

 

 

 

(1) 

Represents the results of operations of Chi-X Europe in accordance with IFRS.

(2) 

Represents the average foreign exchange rate of British pounds into U.S. dollars for the eleven months from January 1, 2011 through November 30, 2011.

(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.

 

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RECLASSIFICATION AND REVERSE STOCK SPLIT

Immediately prior to the completion of 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.

Before effecting the reverse stock split described below, each share of our Voting Common Stock outstanding immediately prior to this offering will be converted into seven shares of Class A common stock and three shares of Class B common stock. Each share of our Non-Voting Common Stock outstanding immediately prior to this offering will be converted into seven shares of Non-Voting Class A common stock and three shares 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 ten shares of our Class A common stock.

Immediately following such reclassification and at any time thereafter, any share of Class B common stock that is held by a stockholder who, together with such stockholder’s affiliates, owns less than 4,960,491 shares of our common stock (subject to reduction as described below), which we refer to as the Class B Threshold, shall, automatically and without any further action, be converted into one share of Class A common stock, and each share of Non-Voting Class B common stock that is held at any time by a stockholder who, together with such stockholder’s affiliates, does not meet the Class B Threshold shall, automatically and without any further action, be converted into one share of Non-Voting Class A common stock. As a result of the reclassification and application of the Class B Threshold, each share of treasury stock held by us will be converted into ten shares of Class A common stock.

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 two and one-half 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 Non-Voting Class A common stock will be subject to a restriction on transfer for one year from the completion of this offering (provided that approximately 50% of our current stockholders’ Class A common stock and Non-Voting Class A common stock may be transferred 180 days from the completion of this offering to the extent such shares are not included in 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 as described in “Description of Capital Stock—Common Stock—Transfer Restrictions.” 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,” or upon the death of the holder. We also have the option to convert any holder’s Class B common stock or Non-Voting Class B common stock to Class A common stock or Non-Voting Class A common stock, respectively, upon a change of control of such holder. Non-Voting Class A common stock and Non-Voting Class B common stock are convertible into Class A common stock and Class B common stock, respectively, at any time at the option of the holder, and 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 4.75-for-1 reverse 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 and the Class B Threshold will be reduced to 1,044,313.

 

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The table below sets forth the number of shares of stock or options that each stockholder or option holder will receive upon the reclassification and reverse stock split for each share of stock or option held immediately prior to the completion of this offering:

 

     Post-Reclassification
and Reverse Stock Split(1)
 

Pre-Reclassification

   Class A
common stock
     Non-Voting
Class A
common
stock
     Class B
common
stock
    Non-Voting
Class B
common
stock
 

1 share of voting common stock

     1.47 shares         —           0.63 shares (2)      —     

1 share of non-voting common stock

     —           1.47 shares         —          0.63 shares (2) 

1 option to purchase a share of voting common stock

     2.11 options         —           —          —     

 

(1) 

We will not issue fractional shares.

(2) 

Each share of Class B common stock or Non-Voting Class B common stock that is held by a stockholder who, together with such stockholder’s affiliates, fails to meet the Class B Threshold will be converted into Class A common stock or Non-Voting Class A common stock, respectively.

Immediately prior to this offering and after giving effect to the reclassification, reverse stock split and the exercise of options to purchase 1,347,290 shares of Class A common stock which are being exercised concurrently with this offering, ten affiliates of our customers, whom we refer to as our strategic investors, collectively owned approximately 27,398,480 shares of our Class A common stock and approximately 11,742,200 shares of our Class B common stock, representing approximately 83.5% 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, Instinet, J.P. Morgan, Morgan Stanley, Tradebot Systems and WEDBUSH. See “Principal and Selling Stockholders.”

 

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USE OF PROCEEDS

We will not receive any proceeds from the sale of our Class A common stock by the selling stockholders in this offering, including any shares sold by one of the selling stockholders in connection with the exercise of the underwriters’ option to purchase additional shares to cover over-allotments.

DIVIDEND POLICY

On February 22, 2012, our board of directors approved a cash dividend of $100 million in the aggregate as a return of capital to stockholders of record as of the close of business on the day immediately prior to the closing of this offering. Our board of directors determined that the dividend is in the best interest of our stockholders. The dividend is conditioned upon the successful completion of this offering, and purchasers in this offering will not be entitled to the dividend. We currently plan to retain any future earnings for use in the operation of our business and to fund future growth; therefore, we do not currently intend to pay dividends on our common stock in the foreseeable future. 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, 2011:

 

   

on an actual basis;

 

   

on a pro forma as adjusted basis to reflect our reclassification and 4.75-for-1 reverse stock split to be consummated in conjunction with this offering, as described under “Reclassification and Reverse Stock Split,” the exercise of options to purchase 1,347,290 shares of Class A common stock which are being exercised concurrently with the offering and the payment of a cash dividend of $100 million in the aggregate to stockholders of record as of the close of business on the day immediately prior to the closing of this offering.

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, 2011  
    Actual     Pro Forma
As Adjusted(1)(2)
 
    (unaudited)  
    (in millions,
except share and per share
data)
 

Cash and cash equivalents

  $ 99.4      $ 101.2   

Short-term and financial investments

  $ 154.8      $ 54.8   
 

 

 

   

 

 

 

Stockholders’ equity:

   

Common stock, $0.01 par value: 24,500,000 voting and 500,000 non-voting shares authorized, 22,435,186 voting and 189,500 non-voting shares issued and 22,190,242 voting and 189,500 non-voting shares outstanding, actual; no voting and non-voting shares authorized, issued and outstanding on a pro forma as adjusted basis

  $ 0.2      $   

Class A common stock, par value $0.01 per share: no shares authorized, issued and outstanding, actual; 125,000,000 shares authorized, 34,063,009 shares issued and outstanding on a pro forma as adjusted basis; Non-Voting Class A common stock, par value $0.01 per share: no shares authorized, issued and outstanding, actual; 1,750,000 shares authorized, 135,578 shares issued and outstanding on a pro forma as adjusted basis

           0.3   

Class B common stock, par value $0.01 per share: no shares authorized, issued and outstanding, actual; 15,000,000 shares authorized, 13,327,780 shares issued and outstanding on a pro forma as adjusted basis; Non-Voting Class B common stock, par value $0.01 per share: no shares authorized, issued and outstanding, actual; 750,000 shares authorized, 119,683 shares issued and outstanding on a pro forma as adjusted basis

           0.1   

Common stock in treasury, at cost: 244,944 shares, actual; no shares on a pro forma as adjusted basis

    (11.5       

Class A common stock in treasury, at cost: no shares, actual; 1,332,101 shares on a pro forma as adjusted basis

           (25.4

Additional paid-in capital

    409.6        361.3   

Retained earnings

    51.9          

Accumulated other comprehensive loss, net

    (3.6     (3.6
 

 

 

   

 

 

 

Total stockholders’ equity

    446.6        332.7   
 

 

 

   

 

 

 

Total capitalization

  $ 446.6      $ 332.7   
 

 

 

   

 

 

 

 

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(1) 

In conjunction with this offering and before effecting the reverse stock split described below, we intend to reclassify each share of our common stock which has been designated as Voting Common Stock as seven shares of Class A common stock and three shares of Class B common stock and each share of our common stock which has been designated as Non-Voting Common Stock as seven shares of Non-Voting Class A common stock and three shares of Non-Voting Class B common stock. We then intend to effect a 4.75-for-1 reverse stock split. 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 two and one-half 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 Reverse Stock Split.” Non-Voting Class A common stock, Class B common stock and Non-Voting Class B common stock convert into Class A common stock in certain circumstances described under “Description of Capital Stock—Common Stock—Conversion.” Each share of treasury stock held by us will be converted into 10 shares of Class A common stock, before effecting the reverse stock split described above. On February 22, 2012, our board of directors approved a cash dividend of $100 million in the aggregate to stockholders of record as of the close of business on the day immediately prior to the closing of this offering. The dividend is conditioned upon the successful completion of this offering, and purchasers in this offering will not be entitled to the dividend. In addition, concurrently with this offering, certain stockholders will exercise options to purchase 1,347,290 shares of Class A common stock.

(2) 

A $1.00 increase/(decrease) in the assumed initial public offering price of $17.00 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 Class A common stock in treasury and total capitalization by approximately $0.48 million, assuming that the number of shares offered, as set forth on the cover page of this prospectus, remains the same.

The above table does not include:

 

   

2,030,604 shares of Class A common stock issuable upon the exercise of outstanding stock options, which represents stock options outstanding as of December 31, 2011 of 3,377,894 with a weighted average exercise price of $13.40 per share less the 1,347,290 stock options being exercised concurrently with this offering; and             

 

   

an aggregate of 104,562 additional shares of Class A common stock reserved for future issuance under our stock option plans as of December 31, 2011.

 

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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 common stock after the offering. Our net tangible book value as of December 31, 2011 was $199.7 million, or $4.19 per share of common stock after giving effect to the reclassification and 4.75-for-1 reverse stock split to be consummated immediately prior to the completion of this offering, as described under “Reclassification and Reverse Stock Split,” and the exercise of options to purchase 1,347,290 shares of Class A common stock which are being exercise concurrently with this offering. Pro forma net tangible book value per share is determined by dividing our tangible net worth (total tangible 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 reclassification and 4.75-for-1 reverse stock split to be consummated immediately prior to the completion of this offering, the exercise of options to purchase 1,347,290 shares of Class A common stock which are being exercise concurrently with this offering and the payment of a cash dividend of $100 million in the aggregate to stockholders of record as of the close of business on the day immediately prior to the closing of this offering, our pro forma net tangible book value at December 31, 2011 would have been $99.7 million or $2.09 per share. This represents dilution to new investors of $14.91 per share. The following table illustrates this per share dilution:

 

Assumed initial public offering price per share of Class A common stock

      $ 17.00   

Pro forma net tangible book value per share of common stock as of December 31, 2011

   $ 2.09      

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

     —        
  

 

 

    

Pro forma net tangible book value per share after offering

        2.09   
     

 

 

 

Dilution in net tangible book value per share of Class A common stock to new investors

      $ 14.91   
     

 

 

 

Dilution is determined by subtracting pro forma net tangible book value per share of 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, 2011, the number of shares of Class A common stock purchased, 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 $17.00 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:

 

     Shares
Purchased
     Total Consideration      Average Price
Per Share
 
     Number      Amount     

Existing stockholders

     34,198,587       $ 410,626,550       $ 12.01   

New investors

     6,296,829         107,046,093         17.00   

Sales by the selling stockholders in this offering will reduce the number of shares of Class A common stock held by existing stockholders to 27,901,758, or approximately 81.6%, and will increase the number of shares of Class A common stock to be purchased by new investors to 6,296,829, or approximately 18.4%, of the total shares of Class A common stock outstanding after the offering. In addition, existing stockholders will hold 100% 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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As of December 31, 2011, after giving effect to the reclassification, the 4.75-for-1 reverse stock split and the exercise of options to purchase 1,347,290 shares of Class A common stock which are being exercised concurrently with this offering, 2,030,604 shares of Class A common stock were subject to outstanding options, which represents stock options outstanding as of December 31, 2011 of 3,377,894 with a weighted average exercise price of $13.40 per share less the 1,347,290 stock options being exercised concurrently with this offering. 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, 2011, 2010 and 2009 and the consolidated statement of financial condition data as of December 31, 2011 and 2010 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, 2009 and 2008 and the consolidated statement of operations for the year ended 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 operating data for the year ended December 31, 2007 from our audited combined financial statements which are not included in this prospectus. As of and for the year ended December 31, 2007, our financial statements are presented on a combined basis representing the entities under common control of BATS Trading, Inc., BATS Exchange, Inc. and BATS Holdings, Inc. 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,         

 

 
    2011     2010     2009     2008(1)(2)          2007(1)(2)  
    (in millions, except shares)            

Consolidated Statements of Operations Data:

           

Revenues:

             

Transaction fees

  $ 695.4      $ 668.3      $ 730.1      $ 642.3          $ 240.1   

Market data fees

    55.4        46.0        50.7        41.5            10.0   

Regulatory transaction fees(3)

    156.4        111.0        125.0        6.1            —     

Other

    19.4        9.5        2.4        —              —     
 

 

 

   

 

 

   

 

 

   

 

 

       

 

 

 

Total revenues

    926.6        834.8        908.2        689.9            250.1   

Cost of revenues:

             

Liquidity payments

    566.1        541.7        618.2        539.6            184.2   

Routing, clearing and other fees

    76.1        82.9        86.1        106.5            68.6   

Section 31 fees(3)

    156.4        111.0        125.0        6.1            —     
 

 

 

   

 

 

   

 

 

   

 

 

       

 

 

 

Total cost of revenues

    798.6        735.6        829.3        652.2            252.8   
 

 

 

   

 

 

   

 

 

   

 

 

       

 

 

 

Revenues less cost of revenues

    128.0        99.2        78.9        37.7            (2.7

Operating expenses:

             

Compensation and benefits

    42.9        30.6        25.1        18.0            7.9   

Depreciation and amortization

    8.4        6.5        4.8        3.0            1.0   

Systems and data communication

    10.1        10.9        7.8        5.0            1.8   

Occupancy

    1.5        1.4        1.4        0.9            0.3   

Professional and contract services

    10.3        3.1        1.3        1.9            1.3   

Regulatory costs

    5.5        4.5        2.8        0.4            —     

Change in fair value of contingent consideration liability

    0.3        —          —          —              —     

General and administrative

    10.7        7.4        5.4        5.7            1.5   
 

 

 

   

 

 

   

 

 

   

 

 

       

 

 

 

Total operating expenses

    89.7        64.4        48.6        34.9            13.8   
 

 

 

   

 

 

   

 

 

   

 

 

       

 

 

 

Operating income (loss)

    38.3        34.8        30.3        2.8            (16.5

Interest and investment income

    0.1        0.3        0.5        2.7            2.0   

Other (expense) income

    (0.1     (0.1     (0.3     2.3            (1.5
 

 

 

   

 

 

   

 

 

   

 

 

       

 

 

 

Income (loss) before income tax provision

    38.3        35.0        30.5        7.8            (16.0

Income tax provision

    14.8        15.2        6.0        0.6            —     
 

 

 

   

 

 

   

 

 

   

 

 

       

 

 

 

Net income (loss)

  $ 23.5      $ 19.8      $ 24.5      $ 7.2          $ (16.0
 

 

 

   

 

 

   

 

 

   

 

 

       

 

 

 

 

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Table of Contents
    Year Ended December 31,         

 

 
    2011     2010     2009     2008(1)(2)          2007(1)(2)  
    (in millions, except shares)            

Earnings per share:

             

Basic

  $ 1.29      $ 1.11      $ 1.38      $ 0.41          $ (1.15

Diluted

  $ 1.26      $ 1.08      $ 1.35      $ 0.40          $ (1.15

Pro forma earnings per share(4):

             

Basic

  $ 0.61               

Diluted

  $ 0.60               

Weighted average common shares:

             

Basic

    18,229,825        17,814,233        17,741,333        17,741,045            13,973,117   

Diluted

    18,745,279        18,303,412        18,175,746        17,969,325            13,973,117   

Pro forma weighted average common shares:

             

Basic

    38,378,579               

Diluted

    39,463,745               

 

(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. A vertical black line has been used between the columns to signify that the amounts shown for the period prior to and subsequent to January 1, 2008 are not directly comparable.

(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. 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 statement of operations because we acted as an agent on these transactions.

(4) 

Gives pro forma effect to the Chi-X Europe acquisition, our reclassification and 4.75-for-1 reverse stock split to be consummated in conjunction with this offering and the exercise of options to purchase 1,347,290 shares of Class A common stock which are being exercised concurrently with this offering.

 

     As of December 31,          

 

 
     2011      2010      2009      2008(1)(2)           2007(1)(2)  
     (in millions)             

Consolidated Statement of Financial Condition Data:

                

Assets:

                  

Cash and cash equivalents

   $ 99.4       $ 150.0       $ 107.7       $ 66.7           $ 47.3   

Short-term and financial investments

     154.8         27.3         55.0         20.1             74.0   

Total assets

   $ 594.9       $ 256.5       $ 239.0       $ 164.2           $ 153.2   
  

 

 

    

 

 

    

 

 

    

 

 

        

 

 

 

Liabilities and stockholders’ equity:

                  

Total liabilities

   $ 148.3       $ 57.8       $ 66.2       $ 19.8           $ 16.3   

Total stockholders’ equity

     446.6         198.7         172.8         144.4             136.9   
  

 

 

    

 

 

    

 

 

    

 

 

        

 

 

 

Total liabilities and stockholders’ equity

   $ 594.9       $ 256.5       $ 239.0       $ 164.2           $ 153.2   
  

 

 

    

 

 

    

 

 

    

 

 

        

 

 

 

 

(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. A vertical black line has been used between the columns to signify that the amounts shown for the period 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, which is reported in our European Equities segment, in October 2008. The European Equities segment also includes the equity transactions that have occurred on the Chi-X Europe trading platform since December 1, 2011, following the acquisition of Chi-X Europe on November 30, 2011. We launched 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,  
     2011     2010     2009  
     (in millions except for trading days and
percentages)
 

U.S. Equities:

      

Average daily volume (ADV):

      

Matched shares

     920.3        888.1        1,024.6   

Routed shares

     106.5        134.9        148.8   
  

 

 

   

 

 

   

 

 

 

Total shares

     1,026.8        1,023.0        1,173.4   
  

 

 

   

 

 

   

 

 

 

Number of trading days

     252        252        252   

Net capture per one hundred touched shares(1)

   $ 0.017      $ 0.014      $ 0.008   

Market share(2)(3)

     11.3     10.2     10.5

European Equities:

      

Average daily notional value (ADNV):

      

Matched notional value

   2,629.4      1,953.2      731.0   

Routed notional value

   66.2      30.7        —     

Average daily volume (ADV):

      

Total shares (matched and routed)

     319.4        268.0        105.3   

Number of trading days

     257        258        257   

Net capture per matched notional value(1)

     0.0011     0.0010     0.0004

Market share(3)

     6.8 %(3)      5.5     2.7

U.S. Options:

      

Total volume:

      

Matched contracts

     136.3        15.1        —     

Routed contracts

     12.0        10.0        —     
  

 

 

   

 

 

   

 

 

 

Total contracts

     148.3        25.1        —     
  

 

 

   

 

 

   

 

 

 

Number of trading days

     252        215     

Net capture per touched contract(1)

   $ (0.010   $ 0.019        —     

Market share(3)

     3.1 %      0.5 %(5)      —     

 

(1) 

Please see the glossary for our definitions of “net capture per one hundred touched shares,” “net capture per matched notional value” and “net capture per touched contract.”

(2) 

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

(3) 

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

(4) 

Represents BATS Chi-X Europe market share (11 months, from January 1, 2011 until November 30, 2011, of BATS Europe market share and the one month ended December 31, 2011 of combined BATS Chi-X Europe market share, as the Chi-X Europe acquisition was completed on November 30, 2011). Had we completed the Chi-X Europe acquisition on January 1, 2011, our combined pro forma market share for the year ended December 31, 2011 would have been 24.1%.

(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,  
     2011     2010     2009     2008     2007  
     (in millions except for percentages, members/participants,
headcount, latency and exchange rates)
 

Other Data:

          

EBITDA(1)

   $ 46.6      $ 41.2      $ 34.8      $ 8.1      $ (17.1

EBITDA margin(2)

     36.4     41.6     44.1     21.6     *   

Normalized EBITDA(1)

   $ 60.3      $ 42.4      $ 34.8      $ 8.1      $ (17.1

Normalized EBITDA margin(3)

     47.1     42.8     44.1     21.6     *   

Operating income as a percentage of revenues less cost of revenues

     29.9     35.1     38.4     7.6     *   

Working capital(4)

   $ 167.4      $ 178.9      $ 156.9      $ 133.1      $ 133.2   

Capital expenditures

   $ 9.6      $ 6.4      $ 5.7      $ 10.7      $ 3.2   

Members/participants (as of period end):

          

BZX

     384        387        382        297        216   

BYX

       237        202        —          —          —     

U.S. Options

     74        60        —          —          —     

BATS Chi-X Europe

     145        88        74        34        —     

Employee headcount

     170        110        97        84        34   

Up-time percentage(5)

     99.940     99.999     99.947     —   (6)      —     

BZX latency(7)

     145.2        164.4        247.0        337.7        616.2   

Average British pound/U.S. dollar exchange rate

     1.604        1.546        1.565        1.575 (8)      *   

Average Euro/U.S. dollar exchange rate

     1.392        1.327        1.394        1.318 (8)      *   

 

* Not meaningful.
(1) 

“EBITDA” is defined as income before interest, income taxes, depreciation and amortization. Normalized EBITDA is defined as EBITDA before Chi-X Europe acquisition costs and initial public offering, or IPO, costs. EBITDA and Normalized 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 Normalized 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 Normalized EBITDA differently than we do. EBITDA and Normalized 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.

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

 

     Year Ended December 31,  
     2011     2010     2009     2008     2007  
     (in millions)  

Net income (loss)

   $ 23.5      $ 19.8      $ 24.5      $ 7.2      $ (16.0

Interest

     (0.1     (0.3     (0.5     (2.7     (2.0

Income tax provision

     14.8        15.2        6.0        0.6        —     

Depreciation and amortization

     8.4        6.5        4.8        3.0        0.9   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

EBITDA

     46.6        41.2        34.8        8.1        (17.1

Chi-X Europe acquisition costs

     11.4        —          —          —          —     

IPO costs

     2.3        1.2        —          —          —     
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Normalized EBITDA

   $ 60.3      $ 42.4      $ 34.8      $ 8.1      $ (17.1
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

(2) 

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

(3) 

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

 

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(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 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. Our principal objective is to make markets better by minimizing inefficiencies and mitigating trade execution risk for market participants. We minimize inefficiencies in part by offering low-cost, rapid, trade execution. For example, during the second half of 2011 our net capture rate in the U.S. equities market was 56% to 68% of the rate reported by NYSE Euronext’s and NASDAQ OMX Group’s U.S. equities operations, while our net capture rate in the European listed equity securities market was approximately 15% of the rate reported by the London Stock Exchange’s European equities operations. During the fourth quarter of 2011, our net capture rate in the U.S. listed equity options market was 25% to 28% of the rate reported by NYSE Arca, NYSE Amex, NASDAQ Options Market and NASDAQ OMX PHLX. We mitigate trade execution risk through offering ultra-low latency order handling through our trading system. In particular, by offering ultra-low latency order handling, our members can very quickly place, modify or cancel orders on our markets. This ability gives our members greater control over their orders, enabling them to rapidly respond to changing market conditions and mitigate trade execution risk. Unlike traditional market operators, we are a technology company at our core. We developed, own and operate the BATS trading platform. With the exception of Chi-X Europe which will be transitioned to our platform during 2012, our proprietary platform powers all of our markets and is designed to offer one of the fastest and most reliable trading systems available.

We began trading listed cash equities securities and exchange-traded products, such as exchange-traded funds, or ETFs, in the United States in the first quarter of 2006 and in Europe during the fourth quarter of 2008. We began offering trading in listed equity options in the United States during the first quarter of 2010, and acquired Chi-X Europe during the fourth quarter of 2011. For the year ended December 31, 2011, we had an 11.3% share of the U.S. equity market and a 3.1% share of the U.S. equity options market. We derived 90.7% of our total revenues from the trading of listed cash equities securities in the United States for the year ended December 31, 2011. In Europe, for the eleven months ended November 30, 2011, we had a 5.7% share of European trading in the securities available for trading on BATS Europe. On November 30, 2011, we acquired Chi-X Europe, the operator of the largest pan-European MTF. For the eleven months ended November 30, 2011, Chi-X Europe had an 18.4% share of European trading in the securities available for trading on Chi-X Europe. For the month ended December 31, 2011, BATS Chi-X Europe had a 25.4% share of European trading in the securities available for trading on BATS Chi-X Europe. Pro forma for the acquisition of Chi-X Europe and assuming we had acquired the business on January 1, 2011, for the year ended December 31, 2011 we would have derived 84.1% of our total revenues from the trading of listed cash equities securities in the United States, 5.8% of our total revenues from the trading of listed equity options in the United States and 10.1% of our total revenues from the trading of listed cash equities securities in Europe. We also would have had a 24.1% share of European trading in the securities available for trading on BATS Chi-X Europe during 2011.

Our revenue is primarily tied to the volume of securities traded on our markets and our market share of trading in the overall U.S. and European equity markets and the U.S. equity options market. Trading volume on our markets can be influenced by a number of factors, including overall market volatility. Our revenue increased from $250.1 million in 2007 to $926.6 million in 2011. This revenue growth is attributable to our increased market share and increased overall market volume, as well as the introduction of new products and services.

 

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For the year ended December 31, 2011, our revenues less cost of revenues were $128.0 million, which represents an increase of 29.0% from the year ended December 31, 2010. A majority of this increase is due to our gain in market share in our U.S. Options and U.S. Equities businesses. A substantial portion of our revenues less cost of revenues is derived from market data fees, which represented 43.3% and 46.4% of revenues less cost of revenues for the years ended December 31, 2011 and 2010, respectively.

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. Seeking to compete on a pan-European basis against incumbent national exchanges, we launched our first MTF, 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 ETFs traded on BATS Europe. In November 2011, we acquired Chi-X Europe, the operator of the largest pan-European MTF. We refer to our two pan-European MTFs together as BATS Chi-X Europe. BATS Chi-X Europe offers trading in listed cash equity securities listed from within 25 European indices, in addition to ETFs, exchange-traded commodities and international depositary receipts. For the year ended December 31, 2011, BATS Chi-X Europe was the largest pan-European MTF in terms of market share and had a 6.8% share of European trading in the securities available for trading on BATS Chi-X 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. We received final approval from the SEC of rules necessary to operate a primary listings business in October 2011 and successfully launched our first listings of seven ETFs three months later in January 2012. Revenues from our listing business will be reported in other revenues.

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 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 higher liquidity rebates 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 fourth quarter of 2010 to 3.0% for the fourth quarter of 2011. We also made a pricing change in our U.S. Options segment in August 2011, which resulted in increased net capture.

 

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In order to grow our market share of the U.S. equity market, 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 2.5% share of the U.S. equity market for the month of December 2011. In addition, in order to continue to capture market share, we are currently offering an inverted pricing special on BYX. Also, similar to NBBO setter pricing described above for listed equity options on BZX, BYX and BZX implemented NBBO setter pricing in May 2011 and July 2011, respectively, for listed cash equity securities. For the year ended December 31, 2011, BZX and BYX combined had an 11.3% 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.

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 and exchange-traded product transaction services that occur on BZX and BYX. It also includes the listed cash equities routed transaction services that occur on our wholly owned subsidiary, BATS Trading. 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, 2011, our U.S. Equities segment represented 90.7% of our total revenues. Pro forma for the acquisition of Chi-X Europe and assuming we had acquired the business on January 1, 2011, our U.S. Equities segment would have represented 84.1% of our total revenues for the year ended December 31, 2011.

 

   

European Equities. Our European Equities segment includes the pan-European listed cash equities transaction services, ETFs, exchange-traded commodities and international depository receipts that occur on our MTFs, which together we refer to as BATS Chi-X Europe. This segment launched operations in 2008, and now includes the equity transactions that occur on the Chi-X Europe trading platform. Our European Equities segment accounted for 3.1% of our total revenues for the year ended December 31, 2011. Pro forma for the acquisition of Chi-X Europe and assuming we had acquired the business on January 1, 2011, our European Equities segment would have represented 10.1% of our total revenues for the year ended December 31, 2011.

 

   

U.S. Options. Our U.S. Options segment includes our listed equity options market on BZX. It also includes the listed equity options routed transaction services that occur on BATS Trading. We began offering trading in listed equity options in February 2010, and our U.S. Options segment contributed 6.2% of our total revenues for the year ended December 31, 2011. Pro forma for the acquisition of Chi-X Europe and assuming we had acquired the business on January 1, 2011, our U.S. Options segment would have contributed 5.8% of our total revenues for the year ended December 31, 2011.

Chi-X Europe Acquisition

On November 30, 2011, we acquired 100% of the outstanding stock of Chi-X Europe, for which Chi-X Europe’s shareholders received, in the aggregate, approximately 4.4 million newly issued shares of our common stock (consisting of 4,177,853 shares of our Voting Common Stock and 189,500 shares of our Non-Voting Common Stock) and approximately $32.3 million in cash. The 4.4 million newly issued shares represented 19.5% of the outstanding shares of our company as of December 31, 2011 (before giving effect to this offering and the related reclassification, 4.75-for-1 reverse stock split and the exercise of options to purchase 1,347,290 shares of Class A common stock which are being exercised concurrently with this offering). In addition, we may pay up to an additional $65 million in cash to Chi-X Europe’s shareholders in the fourth 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 second quarter of 2012. We have incurred approximately $11.4 million in acquisition costs in 2011.

 

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The acquisition has been 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 was 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 beginning in December 2011. The amount of depreciation and amortization is based upon the fair values and the estimated useful lives of the respective assets.

As of the acquisition date, Chi-X Europe’s assets, liabilities and operations, including amortization and depreciation expenses, are reported under our European Equities segment. As a result of the acquisition, we recorded goodwill of approximately $187.1 million that will be assessed for impairment under ASC 350—Intangibles—Goodwill and Other, and we also recorded approximately $62.3 million in identifiable acquired intangible assets, which will result in approximately $6.6 million in amortization expense in 2012. We also incurred $4.6 million in termination benefits related to Chi-X Europe employees and the addition of 50 employees from Chi-X Europe. We expect to incur approximately $5.1 million in additional compensation and benefits expense in 2012 related to termination benefit payments related to Chi-X Europe employees. In addition, pursuant to the acquisition agreement, a contingent cash payment of $0, $30 million or $65 million may be due to Chi-X Europe’s shareholders in the fourth quarter of 2012 if one of the following market-share benchmarks is met in the six-month period beginning on June 1, 2012: (1) a benchmark market share of less than 22% (which would result in no contingent consideration payment) or (2) 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 (3) a benchmark market share of 25% or more (which would result in a $65 million payment). At December 31, 2011, the fair value of the liability for the contingent consideration was $52.6 million. 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. During 2011, we recorded a $300,000 charge related to changes to fair value of contingent consideration.

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

 

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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 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 75.0%, 80.1% and 80.4% of our total revenues for the years ended December 31, 2011, 2010 and 2009, 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

 

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are assessed on a per-share basis. Transaction fees from U.S. Equities accounted for 88.6% of our total transaction fees for the year ended December 31, 2011. Pro forma for the acquisition of Chi-X Europe and assuming we had acquired the business on January 1, 2011, our U.S. Equities segment would have accounted for 80.2% of our transaction fees for the year ended December 31, 2011.

 

   

We earn transaction fees in Europe from the trading of listed cash equity securities on BATS Chi-X Europe. European listed cash equity securities trading revenues are assessed on a notional-value basis. We launched our European operations in October 2008 and acquired Chi-X Europe on November 30, 2011. Transaction fees from our European operations accounted for 4.0% of our total transaction fees for the year ended December 31, 2011. Pro forma for the acquisition of Chi-X Europe and assuming we had acquired the business on January 1, 2011, our European Equities segment would have accounted for 13.1% of transaction fees for the year ended December 31, 2011.

 

   

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 7.4% of our total transaction fees for the year ended December 31, 2011. Pro forma for the acquisition of Chi-X Europe and assuming we had acquired the business on January 1, 2011, our U.S. Options segment would have accounted for 6.7% of our transaction fees for the year ended December 31, 2011.

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 macroeconomic 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, 2011, 2010 and 2009 and the percent changes in our ADV from 2010 to 2011 and from 2009 to 2010:

 

     Year Ended December 31,     Percent  Change
from 2010 to 2011
    Percent  Change
from 2009 to 2010
 
     2011     2010     2009      
     (in millions except percentages)              

U.S. Equities ADV:

          

Matched shares

     920.3        888.1        1,024.6        3.6     (13.3 %) 

Routed shares

     106.5        134.9        148.8        (21.0     (9.3
  

 

 

   

 

 

   

 

 

     

Total shares

     1,026.8        1,023.0        1,173.4        0.4        (12.8
  

 

 

   

 

 

   

 

 

     

Market share(1)

     11.3     10.2     10.5    

 

(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 1,026.8 million shares in 2011, compared to 1,023.0 million shares in 2010 and 1,173.4 million in 2009, an increase of 0.4% in 2011 from 2010 and a decrease of 12.8% in 2010

 

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from 2009. Average daily matched shares in our U.S. Equities segment increased 3.6% in 2011 from 2010 and decreased 13.3% in 2010 from 2009. Total trading days in the United States in 2011, 2010 and 2009 remained constant at 252. The total U.S. equities market ADV decreased 7.4% in 2011 from 2010 and decreased 13.0% in 2010 from 2009.

Our U.S. Equities segment volume remained relatively constant in 2011 from 2010, increasing 0.4%. However, during 2011, our share of the U.S. equities market increased to 11.3%, an increase of 1.1% points from 2010.

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 exchanges which previously enjoyed a nearly 100% share of trading in securities listed on their own exchanges, lost significant market share. For example, the 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 57.8% for the year ended December 31, 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. While there were indications that the economy began to emerge from the recession in mid-2009 similar to the U.S. market, unlike the U.S. market where overall market volumes declined in 2010, both overall volumes and notional volumes in Europe were approximately 10% higher in 2011 compared to 2010 and approximately 31% higher in 2010 compared to 2009. In this climate, BATS Chi-X Europe’s revenues and market share have continued to climb since the 2008 financial crisis.

The following summarizes changes in ADNV for European Equities for the years ended December 31, 2011, 2010 and 2009:

 

     Year Ended December 31,     Percent  Change
from 2010 to 2011
    Percent  Change
from 2009 to 2010
 
     2011     2010     2009      
     (in millions, except percentages)              

European Equities ADNV:

          

Matched notional value

   2,629.4      1,953.2      731.0        34.6     167.2

Routed notional value

     66.2        30.7        —          115.8        *   
  

 

 

   

 

 

   

 

 

     

Total notional value

   2,695.6      1,983.9      731.0        35.9        171.4
  

 

 

   

 

 

   

 

 

     

Total shares

     319.4        268.0        105.3        39.5     154.4

Market share(1)

     6.8 %(2)      5.5     2.7    

 

* Not meaningful.
(1) 

Represents our share of European trading in the securities available for trading on BATS Chi-X Europe and BATS Europe for the years ended December 31, 2011, 2010 and 2009, as applicable. Please see the glossary for our definition of “market share.”

(2) 

Represents BATS Chi-X Europe market share (11 months, from January 1, 2011 until November 30, 2011, of BATS Europe market share and the one month ended December 31, 2011 of combined BATS Chi-X Europe market share, as the Chi-X Europe acquisition was completed on November 30, 2011). Had we completed the Chi-X Europe acquisition on January 1, 2011, our combined pro forma market share for the year ended December 31, 2011 would have been 24.1%.

 

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ADNV for our European Equities segment was €2.7 billion in 2011, compared to €2.0 billion in 2010 and €731.0 million in 2009, an increase of 35.9% in 2011 from 2010 and an increase of 171.4% in 2010 from 2009. Average daily matched notional value in our European Equities segment increased 34.6% in 2011 from 2010 and increased 167.2% in 2010 from 2009. The growth is attributable to increased market volume and increased market share. Total trading days for BATS Chi-X Europe and BATS Europe, as applicable, in 2011, 2010 and 2009 were 257, 258 and 257, respectively.

In 2011, our share of European trading in the securities available for trading on BATS Chi-X Europe was 6.8%, an increase from 5.5% in 2010. The increase is primarily attributed to the acquisition of Chi-X Europe on November 30, 2011.

The following summarizes pro forma ADNV and pro forma market share for the European Equities segment had the Chi-X Europe acquisition been completed on January 1, 2011 and January 1, 2010 for the years ended December 31, 2011 and 2010, respectively:

 

     Year Ended December 31,     Percent Increase/
(Decrease)
 
     Pro Forma 2011     Pro Forma 2010    
     (in millions, except percentages)        

Pro Forma European Equities ADNV:

      

Matched notional value

   9,314.4      8,117.0        14.8

Routed notional value

     66.2        30.7        115.8   
  

 

 

   

 

 

   

Total notional value

   9,380.6      8,147.7        15.1   
  

 

 

   

 

 

   

Total shares

     1,075.3        989.2        8.7

Pro forma market share

     24.1     23.0 %   

On this basis, pro forma ADNV was €9.4 billion in 2011, compared to €8.1 billion in 2010, an increase of 15.1%. This growth is attributable to increased market volume and increased market share. The increased market share is attributable to the growth of Chi-X Europe’s operations.

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 18.1 million contracts in 2011, compared to 3.2 million in 2001, which represents a 10-year compound annual growth rate of nearly 19.1%. 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 2011 was 4.6 billion contracts, which represented an increase of 17.0% compared to 2010.

We began trading listed equity options in the United States in February 2010. The U.S. Options segment handled 148.3 million contracts during the year ended December 31, 2011 and had a 3.1% share of the U.S. equity options market. For the period from February 26, 2010 to December 31, 2010, the U.S. Options segment handled 25.1 million contracts 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 innovative 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.

 

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In order to remain competitive in the U.S. listed cash equity securities market, we have historically maintained a low net capture 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 net capture spread “maker-taker” pricing model. We have also employed a number of pricing specials, as discussed above. We regularly monitor the pricing and net capture spread of our competitors and our relative position, and may make pricing changes to reach market share or other targets. Any changes we make to our pricing may significantly impact our revenues.

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 6.0%, 5.5% and 5.6% of total revenues in 2011, 2010 and 2009, respectively. We currently do not receive any market data fees for trades executed on BATS Chi-X Europe.

Regulatory Transaction Fees

BZX and BYX, as national securities exchanges, are assessed fees pursuant to Section 31 of the Exchange Act. BATS Chi-X Europe is not assessed any Section 31 fees because it is not a U.S. 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. Regulatory transaction fees accounted for 16.9%, 13.3% and 13.7% of our total revenues in 2011, 2010 and 2009, 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 2.1%, 1.1% and 0.3% of our total revenues in 2011, 2010 and 2009, respectively.

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. The historical market data product offers customers the ability to obtain up to three months of historical market data directly downloaded from our website and additional older periods of data via hard drives supplied by us. We charge customers a standard flat fee for each month of data accessed directly from our website and a standard flat fee per drive for historical market data provided via hard drives supplied by us. The last sale data feed is a real time data feed from which we remove all order information and include only transaction detail in time-sequence as trades occur on our order books. We charge one standard fee to any customer whose use of the last sale data feed is internal only and another standard fee to any customer who redistributes the last sale data feed to third parties.

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.

 

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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 Chi-X 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.

Given that BATS Chi-X Europe is not a U.S. 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 BYX to become a member of the UTP, CTA and CQS U.S. tape plans in conjunction with BYX becoming a national securities exchange in 2010.

 

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Components of Operating Expenses

Operating expenses consist of:

 

   

compensation and benefits;

 

   

depreciation and amortization;

 

   

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. As a result of the acquisition of Chi-X Europe, we expect our depreciation and amortization to increase, reflecting growth in property and equipment and the acquired intangible assets. 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) primarily consists of foreign currency gains (losses). Foreign currency gains (losses) are recognized by us, as the functional currency of BATS Chi-X Europe is the British pound.

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 with respect to our U.S. operations, and therefore released $7.2 million of the valuation allowance due to a change in our judgment about the ability to realize our deferred tax assets.

Our effective tax rate decreased from 43.3% in 2010 to 38.6% in 2011. The decrease in the effective tax rate in 2011 compared to 2010 was due to a federal domestic production deduction that we qualified for and a reduction in state income taxes due to changes in certain state allocations. The 2011 effective tax rate also reflects the benefit of discrete items as a result of refunds from prior year returns as a consequence of the state allocation changes.

 

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We have elected to treat BATS Europe and Chi-X Europe as a branch and a partnership, respectively, for U.S. federal income tax purposes. As a result, the taxable income or loss of BATS Europe and Chi-X Europe are included in our consolidated U.S. federal income tax return. If our European operations become sufficiently more profitable in relation to our U.S. operations, we will reevaluate this election. If the characterization is changed, 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, income tax losses which will be carried forward and available to offset future U.K. income tax liabilities. Prior to the acquisition, Chi-X Europe also incurred income tax losses which will be carried forward and available to offset future U.K. income tax liabilities. We assessed the realizability of our U.K. deferred tax assets and determined to provide a full valuation allowance. Pursuant to U.K. tax law, net operating losses do not expire as long as the trade or business that generated the losses remains in existence.

Results of Operations

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

 

     Year Ended December 31,  
     2011     2010     2009  

Revenues:

      

Transaction fees

     75.0     80.1     80.4

Market data fees

     6.0        5.5        5.6   

Regulatory transaction fees

     16.9        13.3        13.7   

Other

     2.1        1.1        0.3   
  

 

 

   

 

 

   

 

 

 

Total revenues

     100.0        100.0        100.0   

Cost of revenues:

      

Liquidity payments

     61.1        64.9        68.1   

Routing and clearing

     8.2        9.8        9.5   

Section 31 fees

     16.9        13.3        13.7   

Other

     0.0        0.1        0.0   
  

 

 

   

 

 

   

 

 

 

Total cost of revenues

     86.2        88.1        91.3   
  

 

 

   

 

 

   

 

 

 

Revenues less cost of revenues

     13.8        11.9        8.7   

Operating expenses:

      

Compensation and benefits

     4.6        3.7        2.8   

Depreciation and amortization

     0.9        0.8        0.5   

Systems and data communication

     1.1        1.3        0.9   

Occupancy

     0.2        0.2        0.2   

Professional and contract services

     1.1        0.4        0.1   

Regulatory costs

     0.6        0.5        0.3   

Change in fair value of contingent consideration liability

     0.0        0.0        0.0   

General and administrative

     1.2        0.8        0.6   
  

 

 

   

 

 

   

 

 

 

Total operating expenses

     9.7        7.7        5.4   
  

 

 

   

 

 

   

 

 

 

Operating income

     4.1        4.2        3.3   

Interest and investment income

     0.0        0.0        0.1   

Other income

     0.0        0.0        0.0   
  

 

 

   

 

 

   

 

 

 

Income before income tax provision

     4.1        4.2        3.4   

Income tax provision

     1.6        1.8        0.7   
  

 

 

   

 

 

   

 

 

 

Net income

     2.5     2.4     2.7
  

 

 

   

 

 

   

 

 

 

Operating income as a percentage of revenues less cost of revenues

     29.9     35.1     38.4
  

 

 

   

 

 

   

 

 

 

 

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Comparison of Years Ended December 31, 2011 and 2010

Overview

The following summarizes changes in financial performance for the year ended December 31, 2011, compared to the year ended December 31, 2010:

 

     Year Ended
December 31,
    Increase/
(Decrease)
    Percent
Change
 
     2011     2010      
     (in millions, except percentages and members/
participants)
 

Total revenues

   $ 926.6      $ 834.8      $ 91.8        11.0

Total cost of revenues

     798.6        735.6        63.0        8.6   
  

 

 

   

 

 

   

 

 

   

Revenues less cost of revenues

     128.0        99.2        28.8        29.0   

Total operating expenses

     89.7        64.4        25.3        39.3   
  

 

 

   

 

 

   

 

 

   

Operating income

     38.3        34.8        3.5        9.9   
  

 

 

   

 

 

   

 

 

   

Income before income tax provision

     38.3        35.0        3.3        9.5   

Income tax provision

     14.8        15.2        (0.4     (2.4
  

 

 

   

 

 

   

 

 

   

Net income

   $ 23.5      $ 19.8      $ 3.7        18.7
  

 

 

   

 

 

   

 

 

   

EBITDA(1)

   $ 46.6      $ 41.2      $ 5.4        12.8

EBITDA margin(2)

     36.4     41.6    

Normalized EBITDA(1)

   $ 60.3      $ 42.4      $ 17.9        42.0

Normalized EBITDA margin(3)

     47.1     42.8    

Operating income as a percentage of revenues less cost of revenues

     29.9     35.1    

Net income as a percentage of revenues less cost of revenues

     18.4     20.0    

Members/participants (as of period end):

        

BZX

     384        387       

BYX

     237        202       

U.S. Options

     74        60       

BATS Chi-X Europe

     145        88       

 

(1) 

“EBITDA” is defined as income before interest, income taxes, depreciation and amortization. Normalized EBITDA is defined as EBITDA before Chi-X Europe acquisition costs and IPO costs. EBITDA and Normalized 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 Normalized 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 Normalized EBITDA differently than we do. EBITDA and Normalized 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 Normalized EBITDA:

 

     Year Ended
December 31,
 
     2011     2010  
     (in millions)  

Net income

   $ 23.5      $ 19.8   

Interest

     (0.1     (0.3

Income tax provision

     14.8        15.2   

Depreciation and amortization

     8.4        6.5   
  

 

 

   

 

 

 

EBITDA

     46.6        41.2   

Chi-X Europe acquisition costs

     11.4          

IPO costs

     2.3        1.2   
  

 

 

   

 

 

 

Normalized EBITDA

   $ 60.3      $ 42.4   
  

 

 

   

 

 

 

 

(2) 

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

(3) 

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

Revenues

Total revenues for the year ended December 31, 2011 were $926.6 million, an increase of $91.8 million, or 11.0%, compared with the same period in 2010 reflecting, in part, higher regulatory transaction fees assessed by the SEC. The following summarizes changes in revenues for the year ended December 31, 2011, compared to the year ended December 31, 2010:

 

     Year Ended
December 31,
     Increase/
(Decrease)
     Percent
Change
 
   2011      2010        
     (in millions, except percentages)  

Transaction fees

   $ 695.4       $ 668.3       $ 27.1         4.0

Market data fees

     55.4         46.0         9.4         20.5   

Regulatory transaction fees

     156.4         111.0         45.4         40.9   

Other

     19.4         9.5         9.9         104.1   
  

 

 

    

 

 

    

 

 

    

Total revenues

   $ 926.6       $ 834.8       $ 91.8         11.0
  

 

 

    

 

 

    

 

 

    

Transaction Fees

Transaction fees increased 4.0% to $695.4 million for the year ended December 31, 2011, representing 75.0% of total revenues, compared with $668.3 million for the prior-year period, or 80.1% of total revenues. This increase in transaction fees was largely driven by a 800.4% increase in matched contracts in the U.S. Options segment, from 15.1 million matched contracts in 2010 to 136.3 million matched contracts in 2011. This increase generated an additional $44.9 million in 2011 compared to 2010. Our European Equities segment transaction revenue increased by $8.6 million, of which $4.8 million was due to the acquisition of Chi-X Europe on November 30, 2011. Offsetting these increases was the decline in transaction fees for our U.S. Equities segment of $26.4 million, or 4.1% as the result of a higher mix of volume from BYX, which receives a significantly lower transaction fee. For the year ended December 31, 2011, 92.1% of transaction fees were attributable to BZX, while 4.3% were attributable to BYX, and the remaining 4.0% were attributable to our European Equities segment. For the year ended December 31, 2010, 97.1% of transaction fees were attributable to BZX, while 0.1% were attributable to BYX, and the remaining 2.9% were attributable to our European Equities segment.

 

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Market Data Fees

Market data fees increased 20.5% to $55.4 million for the year ended December 31, 2011, representing 6.0% of total revenues, compared with $46.0 million for the prior-year period, or 5.5% of total revenues. This increase was largely driven by an increase in the U.S. Equities segment market share, from 10.2% in 2010 to 11.3% in 2011. The increase was also attributable to an increase in the U.S. Options segment market share, from 0.5% in 2010 to 3.1% in 2011.

Regulatory Transaction Fees

Regulatory transaction fees increased 40.9% to $156.4 million for the year ended December 31, 2011, representing 16.9% of total revenues, compared with $111.0 million for the prior-year period, or 13.3% of total revenues. This increase was largely driven by an increase in the overall notional value traded on our national securities exchanges during the period. The notional value traded on BZX and BYX during the year ended December 31, 2011 increased 18.0% over the prior-year period. Also contributing to the increase in regulatory transaction fees was an increase in the Section 31 fee assessment rate, as established by the SEC. The SEC periodically adjusts the assessment rate, which affects the amount of fees that are passed through to members by national securities exchanges. The average rate for the year ended December 31, 2011 was $19.12 per million dollars traded, compared to the prior-year average of $16.24 per million dollars traded.

Other

Other revenues increased $9.9 million to $19.4 million for the year ended December 31, 2011, compared with $9.5 million for the year ended December 31, 2010. This increase was due to a pricing increase for ports that was implemented during 2011 and an increase in the number of ports. Logical port fees increased from $250 to $400 per month and physical port fees increased from $2,000 to $2,500 per month. In addition, there was an increase in logical ports, from 3,040 at December 31, 2010 to 3,464 at December 31, 2011 and an increase in physical ports, from 14 at December 31, 2010 to 80 at December 31, 2011. The European Equities segment also started charging port fees in 2011, contributing $0.4 million to other revenues.

Cost of Revenues

Cost of revenues increased 8.6% to $798.6 million for the year ended December 31, 2011 from $735.6 million for the year ended December 31, 2010. The increase was primarily due to higher regulatory fees assessed by the SEC. The following summarizes changes in cost of revenues for the year ended December 31, 2011 compared to the prior-year period:

 

     Year Ended
December 31,
     Increase/
(Decrease)
    Percent
Change
 
   2011      2010       
     (in millions, except percentages)  

Liquidity payments

   $ 566.1       $ 541.7       $ 24.4        4.5

Routing and clearing

     76.0         82.2         (6.2     (7.5

Section 31 fees

     156.4         111.0         45.4        40.9   

Other

     0.1         0.7         (0.6     (89.2
  

 

 

    

 

 

    

 

 

   

Total

   $ 798.6       $ 735.6       $ 63.0        8.6
  

 

 

    

 

 

    

 

 

   

 

* Not meaningful.

Liquidity Payments

Liquidity payments increased 4.5% to $566.1 million for the year ended December 31, 2011, representing 61.1% of total revenues, compared with $541.7 million for the prior-year period, or 64.9% of total revenues. The increase was primarily due to higher trading volumes in the U.S. Options segment, which represented 8.8% of total liquidity payments for the year ended December 31, 2011. These higher trading volumes in our U.S.

 

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Options segment resulted in an increase in liquidity payments of $47.1 million from 2010. The European Equities segment liquidity payments increased by $4.5 million, of which $3.0 million was due to the acquisition of Chi-X Europe on November 30, 2011. Offsetting these increases was a decline in liquidity payments in the U.S. Equities segment of $27.1 million, or 5.1%, which was primarily driven by a decline in the average rate paid per one hundred matched shares, reflecting a higher mix of volume on BYX, which pays a significantly lower rebate. For the year ended December 31, 2011, liquidity payments per one hundred equity shares matched on our national securities exchanges decreased 7.8% to $ 0.217, down from $0.235 in the prior-year period.

Routing and Clearing

Routing and clearing fees decreased 7.5% to $76.0 million for the year ended December 31, 2011, representing 8.2% of total revenues, compared with $82.2 million for the prior-year period, or 9.8% of total revenues. This decrease in routing and clearing fees was driven by a 21.0% decrease in the ADV of shares routed in the U.S. Equities segment compared to the prior-year period, which represented 93.9% of total routing and clearing fees for the year ended December 31, 2011.

Section 31 Fees

Section 31 fees increased 40.9% to $156.4 million for the year ended December 31, 2011, representing 16.9% of total revenues, compared with $111.0 million for the prior-year period or 13.3% of total revenues for the reasons stated previously under “Regulatory Transaction Fees.”

Revenues Less Cost of Revenues

Revenues less cost of revenues as a percentage of total revenues increased to 13.8% for the year ended December 31, 2011 compared to 11.9% for the year ended December 31, 2010, primarily as a result of the increase in the business conducted by our European Equities and U.S. Options segments, which generally have greater spreads between transaction fees and liquidity payments per share than our U.S. Equities segment. Also contributing to the increase was the 20.3% increase in net capture per one hundred touched shares in our U.S. Equities segment. The increase in net capture was due to price changes implemented in our U.S. Equities and U.S. Options segments. In the U.S. Equities segment, we changed pricing in July 2011 and recognized $14.6 million more in revenues less cost of revenues during the year as a result of the increased net capture rate. If this increased rate had been implemented in January 2011 and the volume of equities traded did not change from January 2011 through June 2011, we would have recognized $12.1 million more in revenues less cost of revenues for the entire year, for a total of $26.7 million for the entire year. In our U.S. Options segment, we changed pricing in August 2011 and recognized $5.3 million more in revenues less cost of revenues during the year as a result of the increased net capture rate. If this increased rate had been implemented in January 2011, and the volume of options traded did not change from January 2011 through July 2011, we would have recognized $6.2 million more in revenues less cost of revenues for the entire year, for a total of $11.5 million for the entire year.

The following summarizes the components of revenues less cost of revenues in 2011, presented as a percentage of revenues less cost of revenues and compared to the prior-year period:

 

     Year Ended
December 31,
     Percent
Increase/
(Decrease)
    Percent of Revenues
Less  Cost of Revenues
 
     2011      2010            2011             2010      
     (in millions)               

Transaction fees less liquidity payments and routing and clearing costs

   $ 53.3       $ 44.4         19.9     41.6     44.8

Market data fees

     55.4         46.0         20.5        43.3        46.4   

Regulatory transaction fees less Section 31 fees

     —           —           —          —          —     

Other revenues less other cost of revenues

     19.3         8.8         119.7        15.1        8.8   
  

 

 

    

 

 

      

 

 

   

 

 

 

Revenues less cost of revenues

   $ 128.0       $ 99.2         29.0     100.0     100.0
  

 

 

    

 

 

      

 

 

   

 

 

 

 

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Transaction Fees Less Liquidity Payments and Routing and Clearing Costs

Transaction fees less liquidity payments and routing and clearing costs increased 19.9% to $53.3 million for the year ended December 31, 2011, representing 41.6% of revenues less cost of revenues, compared with $44.4 million for the prior-year period, or 44.8% of revenues less cost of revenues. The increase was primarily driven by a 20.3% increase in net capture per one hundred touched shares in the U.S. Equities segment, from $0.014 in 2010 to $0.017 in 2011. As a result of the increase in net capture, transaction fees less liquidity payments and routing and clearing costs increased $7.7 million. The increase was also due to higher transaction volume in our European Equities segment, which generally generates a greater spread between transaction fees and liquidity payments per share than our U.S. Equities segment, and resulted in increased transaction fees less liquidity payments and routing and clearing costs of $3.1 million. Inverted pricing specials in the U.S. Options segment offset the increases in transaction fees less liquidity payments and routing and clearing costs by $2.0 million.

Market Data Fees

Market data fees increased 20.5% to $55.4 million for the year ended December 31, 2011, representing 43.3% of revenues less cost of revenues, compared with $46.0 million for the prior-year period, or 46.4% of revenues less cost of revenues. For purposes of calculating these percentages, we have not attributed any incremental costs associated with providing trading and quoting information to the U.S. tape plans. This increase was driven by an increase in the U.S. Equities segment market share from 10.2% for the year ended December 31, 2010 to 11.3% for the year ended December 31, 2011, resulting in an increase of $6.7 million from 2010 to 2011. Further contributing to the increase was an increase in the U.S. Options segment market share, from 0.5% for the period from February 28, 2010 to December 31, 2010 to 3.1% for the year ended December 31, 2011, resulting in an increase of $2.8 million from 2010 to 2011.

Other Revenues Less Other Cost of Revenues

Other revenues less other cost of revenues increased to $19.3 million for the year ended December 31, 2011, representing 15.1% of revenues less cost of revenues, compared with $8.8 million for the prior-year period, or 8.8% of revenues less cost of revenues. This increase was due to the increase in number of logical and physical ports and pricing changes for logical and physical ports for the reasons stated previously under “Other.”

Fluctuations in Revenues Less Cost of Revenues

Fluctuations in revenues less cost of revenues are driven by various factors. Volume variances are driven by changes in overall industry volume and our share of those volumes, while net capture variances are driven by pricing changes. The following summarizes the fluctuations in revenues less cost of revenues from December 31, 2010 to December 31, 2011 and attributes the fluctuations to various sources:

 

     Total     Percentage
of Total
 
     (in millions)        

Market volume

   $ (1.2     (4.3 )% 

Market share

     24.3        84.4   

Net capture

     (4.4     (15.1

Chi-X Europe acquisition

     2.0        6.9   

Other

     8.1        28.1   
  

 

 

   

 

 

 

Revenues less cost of revenues

   $ 28.8        100.0
  

 

 

   

 

 

 

The increase in revenues less cost of revenues was primarily driven by increases in market share by the U.S. Equities segment from 10.2% in 2010 to 11.3% in 2011 and U.S. Options segment from 0.5% in 2010 to 3.1% in 2011. The $8.1 million increase in other was attributable to the increase in port fee pricing implemented in January and February 2011.

 

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Operating Expenses

Total operating expenses increased 39.3% to $89.7 million for the year ended December 31, 2011, compared with $64.4 million for the year ended December 31, 2010. $9.0 million of the $25.3 million increase over the prior-year period was due to the inclusion of Chi-X Europe operating expenses for the month of December 2011, and was primarily due to an increase in compensation and benefits expense driven by $4.6 million in termination benefits related to Chi-X Europe employees and the addition of 50 employees from Chi-X Europe. We expect to incur approximately $5.1 million in additional compensation and benefits expense in 2012 related to termination benefit payments related to Chi-X Europe employees. Also driving the increase was an increase in costs incurred related to the Chi-X Europe acquisition and this offering. The following summarizes changes in operating expenses for the year ended December 31, 2011, compared to the prior-year period:

 

     Year Ended
December 31,
     Increase/
(Decrease)
    Percent
Change
 
   2011      2010       
     (in millions)               

Operating expenses:

          

Compensation and benefits

   $ 42.9       $ 30.6       $ 12.3        40.3

Depreciation and amortization

     8.4         6.5         1.9        28.4   

Systems and data communication

     10.1         10.9         (0.8     (7.4

Occupancy

     1.5         1.4         0.1        7.3   

Professional and contract services

     10.3         3.1         7.2        228.9   

Regulatory costs

     5.5         4.5         1.0        21.0   

Change in fair value of contingent consideration liability

     0.3         —           0.3        100.0   

General and administrative

     10.7         7.4         3.3        47.1   
  

 

 

    

 

 

    

 

 

   

Total operating expenses

   $ 89.7       $ 64.4       $ 25.3        39.3
  

 

 

    

 

 

    

 

 

   

Compensation and Benefits

Compensation and benefits increased by $12.3 million to $42.9 million for the year ended December 31, 2011, representing 4.6% of total revenues, compared with $30.6 million for the prior-year period, or 3.7% of total revenues. The increase was primarily due to $4.6 million in termination benefits to certain Chi-X Europe employees. Also contributing to the increase were expenses associated with the increase in headcount related to the Chi-X Europe acquisition, an increase in 2011 U.S. employee headcount and annual pay increases.

Depreciation and Amortization

Depreciation and amortization increased by $1.9 million to $8.4 million for the year ended December 31, 2011, compared with $6.5 million for the same period in 2010, primarily reflecting additions to property and equipment placed in service subsequent to December 31, 2010 related to the enhancement and expansion of the Slough data center in the U.K. The increase also reflects amortization expense of $0.4 million from the intangible assets acquired from Chi-X Europe.

Systems and Data Communication

Systems and data communication costs decreased by $0.8 million to $10.1 million for the year ended December 31, 2011, compared with $10.9 million for the same period in 2010. The decrease was primarily due to the OPRA plan entrance fee of $1.5 million in 2010, as well as the enhancement and expansion of our data center space and increased costs for electricity at our data center which we incurred as a result of launching our U.S. listed equity options market and BYX during 2010, which required additional bandwidth to connect to the

 

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National Market System and provide a direct feed of quote and trade activity to the system in connection with our participation in U.S. tape plans. This decrease in 2011 was offset by additional costs resulting from the Chi-X Europe acquisition and duplicate Slough and Dockland data center costs associated with the European data center move in 2011.

Occupancy

Occupancy expenses increased to $1.5 million for the year ended December 31, 2011, from $1.4 million in 2010, driven by the incremental occupancy costs incurred as a result of the Chi-X Europe acquisition.

Professional and Contract Services

Professional and contract services fees increased by $7.2 million to $10.3 million for the year ended December 31, 2011, compared with $3.1 million for the prior-year period. The increase was primarily due to $2.3 million in legal and professional services rendered during 2011 in preparation of becoming a public company, as well as professional and contract services of $5.7 million rendered in connection with the acquisition of Chi-X Europe in 2011.

Regulatory Costs

Regulatory costs increased by $1.0 million to $5.5 million for the year ended December 31, 2011, compared with $4.5 million for the same period in 2010. The increase was primarily due to an increase in fees paid to FINRA and CBOE under our regulatory contracts. With respect to our regulatory contracts with FINRA and CBOE, we are billed for time spent by FINRA and CBOE staff working on an examination or investigation related to our U.S. markets. As a result of our market share growth during 2011, the number of examinations and investigations conducted increased. During 2011 we changed regulatory service vendors, from FINRA to CBOE. In conjunction with the transition to CBOE, FINRA continues to provide some regulatory services to BZX and BYX under the FINRA RSA, including completing examinations and investigations that were in process with BZX and BYX.

Change in Fair Value of Contingent Consideration Liability

Change in fair value of contingent consideration liability was $0.3 million for the year ended December 31, 2011, due to the passage of time from the Chi-X Europe acquisition date of November 30, 2011 to December 31, 2011.

General and Administrative

General and administrative expenses increased by $3.3 million to $10.7 million for the year ended December 31, 2011, compared with $7.3 million for the prior-year period. This increase was due primarily to $1.9 million in Chi-X Europe acquisition costs, including stamp duty transaction tax of $1.8 million.

Operating Income

As a result of the items above, operating income for the year ended December 31, 2011 was $38.3 million, or 29.9% of revenues less cost of revenues, compared to $34.8 million, or 35.1% of revenues less cost of revenues, for the year ended December 31, 2010, an increase of $3.5 million, or 9.9%.

Interest and Investment Income

Interest and investment income decreased by $0.2 million to $0.1 million for the year ended December 31, 2011, compared with $0.3 million for the prior-year period. This decrease was primarily due to lower yields realized on invested cash in the year ended December 31, 2011 compared with the same period in 2010. During these periods we primarily invested our excess cash in highly liquid, short-term investments such as U.S. Treasury securities.

 

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Other Expense

Other expense remained consistent at $0.1 million for the years ended December 31, 2011 and December 31, 2010.

Income before Income Tax Provision

As a result of the above, income before income tax provision for the year ended December 31, 2011 was $38.3 million compared to $35.0 million for the year ended December 31, 2010, an increase of $3.3 million.

Income Tax Provision

For the year ended December 31, 2011, the income tax provision was $14.8 million compared with $15.2 million for the year ended December 31, 2010. The effective tax rate for the year ended December 31, 2011 was 38.6%, compared to 43.3% for the year ended December 31, 2010. The decrease in the effective tax rate in 2011 compared to 2010 was due to a federal domestic production deduction we qualified for and a reduction in state income taxes due to changes in certain state allocations. The 2011 effective tax rate also reflects the benefit of discrete items as a result of refunds from prior year returns as a consequence of the state allocation changes.

Net Income

As a result of the items above, net income for the year ended December 31, 2011 was $23.5 million, or 18.4% of revenues less cost of revenues, compared to $19.8 million, or 20.0% of revenues less cost of revenues, for the year ended December 31, 2010, an increase of $3.7 million.

Segment Operating Results

The following summarizes our total revenues by segment:

 

                   %
Increase/
(Decrease)
    % of Total
Revenues
 
     2011      2010        2011     2010  
     (in millions)                     

U.S. Equities

   $ 840.8       $ 808.2         4.0     90.7     96.8

European Equities

     28.3         19.1         48.5        3.1        2.3   

U.S. Options

     57.5         7.5         *        6.2        0.9   
  

 

 

    

 

 

      

 

 

   

 

 

 

Total revenues

   $ 926.6       $ 834.8         11.0     100.0     100.0
  

 

 

    

 

 

      

 

 

   

 

 

 

 

* Not meaningful.

The following summarizes our revenues less cost of revenues by segment:

 

                   %
Increase/
(Decrease)
    % of Total
Revenues
 
     2011      2010        2011     2010  
     (in millions)                     

U.S. Equities

   $ 115.4       $ 91.2         26.5     12.4     10.9

European Equities

     10.6         6.9         54.1        1.1        0.9   

U.S. Options

     2.0         1.1         77.5        0.2        0.1   
  

 

 

    

 

 

      

 

 

   

 

 

 

Revenues less cost of revenues

   $ 128.0       $ 99.2         29.0     13.7     11.9
  

 

 

    

 

 

      

 

 

   

 

 

 

 

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U.S. Equities

The following summarizes revenues, cost of revenues, operating expenses and operating income for our U.S. Equities segment:

 

     Year Ended
December  31,
    %
Increase/
(Decrease)
    % of Total
Revenues
 
     2011     2010       2011     2010  
    

(in millions,

except percentages)

                   

Revenues:

          

Transaction fees

   $ 616.2      $ 642.6        (4.1 )%      66.5     77.0

Market data fees

     52.0        45.3        14.7        5.6        5.4   

Regulatory transaction fees

     153.9        110.8        38.9        16.6        13.3   

Other

     18.7        9.5        96.5        2.0        1.1   
  

 

 

   

 

 

     

 

 

   

 

 

 

Total revenues

     840.8        808.2        4.0        90.7        96.8   

Cost of revenues:

          

Liquidity payments

     499.9        527.0        (5.1     54.0        63.1   

Routing and clearing payments

     71.5        78.5        (9.0     7.7        9.4   

Section 31 fees

     153.9        110.8        38.9        16.6        13.3   

Other

     0.1        0.7        (91.1     0.0        0.1   
  

 

 

   

 

 

     

 

 

   

 

 

 

Total cost of revenues

     725.4        717.0        1.2        78.2        85.9   
  

 

 

   

 

 

     

 

 

   

 

 

 

Revenues less cost of revenues

     115.4        91.2        26.5        12.5        10.9   

Operating expenses

     45.7        40.6        12.4        4.9        4.9   
  

 

 

   

 

 

     

 

 

   

 

 

 

Operating income

   $ 69.7      $ 50.6        37.8     7.6     6.0
  

 

 

   

 

 

     

 

 

   

 

 

 

EBITDA(1)

   $ 74.5      $ 55.0        35.2    

EBITDA margin(2)

     64.6     60.3      

Operating income as a percentage of revenues less cost of revenues

     60.4     55.5      

 

(1) 

“EBITDA” is defined as income before interest, income taxes, depreciation and amortization. EBITDA does not represent, and should not be considered as, an alternative to net income or cash flows from operations, each as determined in accordance with U.S. GAAP. We have presented EBITDA because we consider it an important supplemental measure of our performance and believe that it is frequently used by analysts, investors and other interested parties in the evaluation of companies. Other companies may calculate EBITDA differently than we do. EBITDA has limitations as an analytical tool, and you should not consider it in isolation or as a substitute for analysis of our results as reported under U.S. GAAP.

The following is a reconciliation of net income to EBITDA:

 

    Year Ended December 31,  
    2011     2010  
    U.S.
Equities
    European
Equities
    U.S.
Options
    Corporate
items and
eliminations
    Total     U.S.
Equities
    European
Equities
    U.S.
Options
    Corporate
items and
eliminations
    Total  
    (in millions)  

Net income (loss)

  $ 46.5      $ (21.5   $ (4.4   $ 2.9      $ 23.5      $ 32.1      $ (8.3   $ (6.2   $ 2.2      $ 19.8   

Interest

    (0.1     —          —          —          (0.1     (0.3     —          —          —          (0.3

Income tax provision (benefit)

    23.4        (3.1     —          (5.5     14.8        18.7        —          —          (3.5     15.2   

Depreciation and amortization

    4.7        2.8        0.9        —          8.4        4.5        1.2        0.7        0.1        6.5   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

EBITDA

  $ 74.5      $ (21.8   $ (3.5   $ (2.6   $ 46.6      $ 55.0      $ (7.1   $ (5.5   $ (1.2   $ 41.2   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 
(2) 

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

 

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For the year ended December 31, 2011, U.S. Equities operating income increased $19.1 million, to $69.7 million. While total shares traded on our U.S. listed cash equities markets remained relatively flat from 2011 to 2010, operating income increased primarily due to a $9.2 million increase in other revenue as we increased our port pricing in January and February 2011. Also contributing to the increase was a 20.3% increase in net capture per one hundred touched shares in the U.S. Equities segment, from $0.014 in 2010 to $0.017 in 2011, which resulted in $8.9 million in incremental revenues less cost of revenues. The increase in market share from 2010 to 2011 resulted in an increase of market data revenue of $6.7 million. These increases were offset by a 7.4% decline in overall U.S. equities market volume, which resulted in a $2.2 million decrease in revenues less cost of revenues.

European Equities

The following table shows revenues, cost of revenues, operating expenses and operating loss for our European Equities segment:

 

     Year Ended
December  31,
    % Increase/
(Decrease)
    % of Total Revenues  
     2011     2010       2011     2010  
     (in millions)                    

Revenues

   $ 28.3      $ 19.1        48.5     3.1     2.3

Cost of revenues

     17.7        12.2        45.4        1.9        1.4   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Revenues less cost of revenues

     10.6        6.9        54.1        1.1        0.9   

Operating expenses

     35.0        15.2        130.8        3.8        1.8   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Operating loss

     (24.4   $ (8.3     194.7     (2.7 )%      (0.9 )% 
  

 

 

   

 

 

     

 

 

   

 

 

 

EBITDA(1)

   $ (21.8   $ (7.1     208.5    

EBITDA margin(2)

     (204.9 )%      *         

Operating income as a percentage of revenues less cost of revenues

     (229.4 )%      *         

 

* Not meaningful.
(1) 

See footnote (1) to the table under “—U.S. Equities” above for a reconciliation of net loss to EBITDA.

(2) 

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

For the year ended December 31, 2011, the European Equities segment’s operating loss increased $16.1 million to $24.4 million, primarily driven by $11.4 million of expenses related to the Chi-X Europe acquisition. Revenues less cost of revenues resulting from the Chi-X Europe acquisition were $2.0 million for the month of December 2011. An increase of $9.0 million in operating expenses over the prior-year period was due to the inclusion of Chi-X Europe operating expenses for the month of December 2011.

 

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U.S. Options

The following summarizes revenues, cost of revenues, operating expenses and operating loss for our U.S. Options segment:

 

     Year Ended
December 31,
    %
Increase/
(Decrease)
    % of Total
Revenues
 
     2011     2010       2011     2010  
     (in millions)                    

Revenues:

          

Transaction fees

   $ 51.5      $ 6.6        *        5.6     0.8

Market data fees

     3.4        0.6        *        0.4        0.1   

Regulatory transaction fees

     2.5        0.3        *        0.3        —     

Other

     0.1        —          *        —          —     
  

 

 

   

 

 

     

 

 

   

 

 

 

Total revenues

     57.5        7.5        *        6.3        0.9   

Cost of revenues:

          

Liquidity payments

     50.1        3.0        *        5.4        0.4   

Routing and clearing payments

     2.9        3.1        (6.9 )%      0.3        0.4   

Section 31 fees

     2.5        0.3        *        0.3        —     
  

 

 

   

 

 

     

 

 

   

 

 

 

Total cost of revenues

     55.5        6.4        *        6.0        0.8   
  

 

 

   

 

 

     

 

 

   

 

 

 

Revenues less cost of revenues

     2.0        1.1        77.5        0.3        0.1   

Operating expenses

     6.4        7.3        (11.8     0.7        0.9   
  

 

 

   

 

 

     

 

 

   

 

 

 

Operating loss

   $ (4.4   $ (6.2     (28.0     (0.4 )%      (0.8 )% 
  

 

 

   

 

 

     

 

 

   

 

 

 

EBITDA(1)

   $ (3.5   $ (5.5     (35.0    

EBITDA margin(2)

     (178.9 )%      *         

Operating loss as a percentage of revenues less cost of revenues

     (223.1 )%      *         

 

* Not meaningful.
(1)

See footnote (1) to the table under “—U.S. Equities” above for a reconciliation of net loss to EBITDA.

(2)

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

The U.S. Options segment launched trading operations in the first quarter of 2010. The decrease in operating loss is primarily due to the increase in market share from 0.5% for the period from February 28, 2010 to December 31, 2010 to 3.1% for the year ended December 31, 2011. Also contributing to the decrease in operating loss was an increase in total contracts, from 25.1 million for the period ended December 31, 2010 to 148.3 million for the year ended December 31, 2011, as well as a decrease in systems and data communication costs of nearly $1.5 million compared to the prior year period due to the OPRA entrance fee paid during 2010 in connection with the launch of the U.S. Options market. During the first, second and third quarters of 2011, the U.S. Options segment experienced operating losses of $2.5 million, $2.0 million and $0.5 million, respectively, while it generated operating income of $0.6 million during the fourth quarter of 2011.

 

78


Table of Contents

Comparison of Years Ended December 31, 2010 and 2009

Overview

The following summarizes changes in financial performance for the year ended December 31, 2010, compared to the year ended December 31, 2009:

 

     Year Ended
December 31,
    Increase/
(Decrease)
    Percent
Change
 
     2010     2009      
     (in millions, except
percentages and
members/
participants)
             

Total revenues

   $ 834.8      $ 908.2      $ (73.4     (8.1 )% 

Total cost of revenues

     735.6        829.3        (93.7     (11.3
  

 

 

   

 

 

   

 

 

   

Revenues less cost of revenues

     99.2        78.9        20.3        25.7   

Total operating expenses

     64.4        48.6        15.8        32.4   
  

 

 

   

 

 

   

 

 

   

Operating income

     34.8        30.3        4.5        15.1   
  

 

 

   

 

 

   

 

 

   

Income before income tax provision

     35.0        30.5        4.5        14.7   

Income tax provision

     15.2        6.0        9.2        153.0   
  

 

 

   

 

 

   

 

 

   

Net income

   $ 19.8      $ 24.5      $ (4.7     (19.1 )% 
  

 

 

   

 

 

   

 

 

   

EBITDA(1)

   $ 41.2      $ 34.8      $ 6.4        18.5
  

 

 

   

 

 

   

 

 

   

EBITDA margin(2)

     41.6     44.1    

Normalized EBITDA(1)

   $ 42.4      $ 34.8      $ 7.6        21.9

Normalized EBITDA margin(3)

     42.8     44.1    

Operating income as a percentage of revenues less cost of revenues

     35.1     38.4    

Net income as a percentage of revenues less cost of revenues

     20.0     31.1    

Members/participants (as of period end):

        

BZX

     387        382