New York Stock Exchange
Traders on the floor of the New York Stock Exchange (Reuters)

The dominance of the New York Stock Exchange (NYSE) and Nasdaq in the US securities market could be challenged by the potential merger of BATS Global Markets and Direct Edge Holdings, creating the second largest stock market operator in the country.

According to media reports, BATS is in advanced talks with Direct Edge over a merger. Direct Edge and BATS are the third and fourth largest stock exchanges in the US by trading volume, after the NYSE and Nasdaq.

A combination of the two companies built by trading firms and banks would challenge rivals with its "technology geared toward rapid, electronic trading", according to the Wall Street Journal.

The Journal's sources said that a deal could be announced within days, but there is a chance it could still fall through. It is subject to approval by the US Securities and Exchange Commission (SEC), and could be reviewed by the Justice Department as well.

The deal comes after Nasdaq, the world's largest electronic stock market, suspended trading in all listed securities for almost three hours due to a technical issue. The development put Nasdaq's reliability at stake and highlighted the vulnerability of the electronic trading system.

Combination with Significant Prospects

Market data from BATS showed that the merged entity would represent about 20.6% of the overall share trading market, the second-biggest in the US, the Journal reported. The combination would also create the largest cash-equities venue, according to Fox Business.

BATS operates two stock exchanges, the BZX Exchange and the BYX Exchange, and an options market in the US. They account for about 12-13% of all US equity trading on a daily basis, according to the company. It also runs one of the largest pan-European stock markets.

Established in 2005, the company tried and failed to go public in 2012.

New Jersey-based Direct Edge operates two separate platforms, EDGA Exchange and EDGX Exchange, pioneering a bifurcated market structure. The company claims that it uses brand new technology designed to reduce latency and increase reliability in securities trading.

Direct Edge was in talks to be acquired by the TMX Group, which operates the Toronto Stock Exchange.

The biggest player in the US, NYSE, is planning to complete its merger with IntercontinentalExchange (ICE) this autumn.