Is BATS-Direct Edge the next owner of the NYSE?

NYSE Wall Street

The BATS/Direct Edge merger may seem like a deal between two sleepy exchanges, but in one fell swoop the combined entity has become a potentially bigger story: it is a logical buyer for the NYSE's cash equity business.

Recall that NYSE is in a merger with Intercontinental Exchange (ICE), which will almost certainly close in October or November at the latest.

While the NYSE is famous for its iconic trading floor that is associated with stock trading, that part of the business is a tiny portion of NYSE's revenues. U.S. cash equities are only about 7% of revenues. Selling market data generates twice as much revenues. Listing fees are 20%.

It's also a low-margin business. The growth is in derivatives. The formula for exchanges is simple: squeeze out costs and push as much trading as you can through a scalable platform that includes stocks, options, and futures.

This leaves stock trading as the lowly cousin on the revenue front, but one with a very high profile.

There has been plenty of speculation that,once the dust settles, ICE will find a politically expedient way to spin off the cash equities business of the NYSE, perhaps including the listings business.

One problem has been the lack of a natural buyer. There is no way regulators will allow NASDAQ to buy the NYSE because there would be an effective monopoly on listings.

So who else would buy them? The combined BATS/Direct Edge now becomes a natural potential buyer.

I asked Direct Edge CEO William O'Brien on our air if BATS/Direct Edge would be interested in acquiring the NYSE cash equities business down the road. His response: 'For us, if you look at any potential M&A opportunities down the road, it's 'can it help us make customer lives better?' If it is, we'd be strongly interested in it, and if it's not, we'd probably look elsewhere.'

This is not a story that is going to happen in the near future. But for anyone who is looking for an 'end game' in the stock trading business, a sale of the NYSE equity business to BATS say, two years down the road, makes some sense.

-By CNBC's Bob Pisani

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