Chicago Stock Exchange forced to again re-evaluate future after SEC axes deal

Chicago Stock Exchange Inc.'s future is now up in the air after regulators blocked an investor group's bid to acquire the company.

Two years ago, one of the smallest U.S. exchange operators struck an acquisition agreement with a consortium of China- and U.S.-based investors. The deal represented the Chicago Stock Exchange's chance to position itself as a gateway to U.S. markets for Chinese companies to go public through.

But those hopes were dashed Feb. 15 when the U.S. Securities and Exchange Commission's five-person commission unanimously rejected the bid, capping what could be the end of a two-year saga rife with executives, lawmakers and regulators regularly trading barbs over the now-rejected deal.

Now, the small Chicago-based bourse must figure out the best way to move forward in a hyper-competitive exchange space.

"They've got to do something different," Jim Angel, a finance professor at Georgetown University, said in an interview. "They can't really survive on a business-as-usual basis."

With less than 1% of U.S. equity market share, the Chicago Stock Exchange has struggled to cement a foothold in U.S. equity markets versus larger domestic rivals such as Intercontinental Exchange Inc., Nasdaq Inc. and Cboe Global Markets Inc.

The exchange operator previously attempted to differentiate itself through the increasingly profitable business line of providing market data feeds to traders, but struggled to gain traction over its larger competitors. It also looked to tap into the growing trend of creating speed bumps to draw in new traders, but the SEC's commissioners froze a decision on the proposal in October 2017.

The bid had represented a chance for the Chicago Stock Exchange to become an initial public offerings hub for Chinese companies, potentially cementing its specialization. But with it now blocked, the exchange may look to double down by fighting the SEC's decision in the courts.

The Chicago Stock Exchange has already pushed back on the regulator's decision, saying in a statement that the SEC's disapproval order "contains logic and representations with which [the exchange operator] strongly disagrees." A company spokesperson declined to comment further.

Appealing the decision would likely rekindle criticisms of the bid led by China-based Chongqing Casin Enterprise Group. Over the course of the bid, lawmakers from both sides of the political aisle spoke out against it, with many claiming that it could expose U.S. markets to foreign threats.

"This has been a long fight, and I am grateful we now have a president who recognizes the national security threats of allowing a Chinese government-affiliated company to own the Chicago Stock Exchange," Rep. Robert Pittenger, R-N.C., one of the deal's most fervent critics, said in a statement.

The SEC's rejection marked a rare decision by the regulator to deviate from staff recommendations; the SEC's Division of Trading and Markets recommended that the bid be approved six months earlier. But the commissioners, led by Chairman Jay Clayton, ultimately decided that the Chicago Stock Exchange failed to show how it would "effectively monitor or enforce compliance" with ownership and voting limitations, according to a Feb. 15 regulatory filing.

Now that regulators struck down the China-tied bid, the Chicago Stock Exchange will likely see an influx of interest, including from rival stock exchange operators like IEX Services LLC and Canada-based TMX Group Ltd.., which operates the Toronto Stock Exchange, Georgetown's Angel said. An acquisition of the Chicago trading venue could provide IEX or TMX with a chance to expand through another venue or to try out new trading structures.

Despite its size, the Chicago Stock Exchange will also draw interest from other companies such as private equity companies, Healthy Markets Association Executive Director Tyler Gellasch said in an interview.

The exchange operator's exchange license, a classification for national market exchanges that is acquired from the SEC through a lengthy and difficult process, could become a key selling point for some companies, Gellasch said.

"It's not unlike someone buying a storefront with a good location and a nice kitchen in the back," he said.

The trading hub may also be an attractive investment for virtual currency exchanges such as Coinbase Inc., Greenwich Associates analyst Richard Johnson said in an interview.

Staking a claim in the Chicago Stock Exchange could allow a virtual currency exchange to get out in front of potential upcoming regulations from the SEC. The regulator has hinted at possibly requiring companies like Coinbase to register as exchanges under the Exchange Act, said Johnson, who added that acquiring the Chicago trading venue could serve as a fast track to reach regulatory compliance.

"There's a very strong likelihood that people who run crypto exchanges are looking at this and thinking about it, and bankers are coming to them and telling them to look at it," he said.