BATS IPO on the way: Hotspot FX parent company tries (again) to go public

Operator of securities exchanges and electronic markets BATS Global Markets Inc. – known better in the FX world as the company which paid $365 million to buy Hotspot FX earlier this year – is taking another crack at listing itself on a securities exchange.

BATS has filed for an IPO planning to raise about $100 million in early 2016. In its filing BATS reported Revenues of $1.34 billion for the first nine months of 2015, with Net Profit coming in at $57 million.

Will BATS list its shares on the NYSE or NASDAQ? Neither, actually. BATS intends to list its common stock on its own BATS Exchange under the symbol BATS.

BATS Global MarketsAs we hinted above, this is not BATS’s first attempt at going public. In early 2012 BATS had to pull its IPO after a series of embarrassing software glitches in the trading of its own shares.

An interesting overview of the IPO by MarketWatch points out that thirteen BATS key customers are also its principal investors (i.e. big banks), and also provide mission critical services such as clearing and routing. In addition, a number of the same companies are also underwriting the offering, which is being led by Morgan Stanley and Citigroup.

So what does the BATS IPO filing have to say about its Forex ECN unit Hotspot FX?

A few interesting things, actually.

Revenues – Hotspot did $32.3 million of Revenues in the first nine months of 2015, generating Operating Income of $2 million. That indicates shrinking business at Hotspot – for the full year 2014 Hotspot did $47.5 million in Revenue and $12.3 million of profit. We believe 2015 profits at Hotspot were reduced by costs related to the BATS acquisition including amortization of related intangible assets, so it is hard to make an apples-to-apples comparison, but the revenue trend is definitely downward.

Market share – Hotspot FX has an estimated 11.5% share of the publicly reported institutional spot FX market.

Hotspot’s platform – Although BATS acquired Hotspot’s proprietary trading platform as part of the acquisition, BATS is evaluating migrating Hotspot to BATS’s existing technology platform in the coming years.

Expanding product line – BATS intends to leverage its expanded footprint in institutional spot FX trading to offer BATS Hotspot customers other non-spot FX instruments such as forwards, swaps and options that make up the majority of the over $5 trillion in global daily notional value traded. As regulatory and other structural changes continue to evolve in the FX industry, BATS intends to enhance its offering to support additional automation and algorithmic trading, enhance client workflow and execution quality and increase penetration into new customer segments.

Connectivity fees – BATS is considering introducing market data products and connectivity fees to its BATS Hotspot platform.

Indices – In Europe, BATS intends to leverage its position as the leading exchange and OTC reporting facility to use its market data to develop indices and other information services.

SEF (US) and MTF (UK) launches – BATS Hotspot may launch an SEF. Launching the SEF would require BATS Hotspot to comply with additional regulatory obligations, as the SEF would be registered with and regulated by the CFTC. For example, under Dodd-Frank and CFTC rules, SEFs must establish and enforce trading and market monitoring procedures and maintain comprehensive business records, among other requirements. Similarly, BATS Hotspot may also launch an MTF in the United Kingdom that would be registered with and regulated by the FCA, and subject to corresponding obligations.

Additional consideration to KCG – In addition to the $365 million in cash which BATS paid to KCG for Hotspot FX, BATS has agreed to make a future payment to KCG to share tax benefits which BATS will enjoy over time by virtue of acquiring Hotspot. Those future ‘tax benefit sharing’ payments are estimated at $62.6 million.

We will continue to cover the BATS IPO as it progresses. You can see the complete BATS S-1 IPO filing on the SEC website by clicking here.

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