The head of Direct Edge said Monday that its formal application for exchange status would make the U.S. equity trading operator more profitable and bolster its industry standing.

Direct Edge is already the third-largest venue for trading U.S. equities, and Chief Executive William O'Brien said that the planned conversion to an exchange would also allow it to explore new asset classes and expand its geographical reach.

The company is the latest in the new breed of electronic trading platforms to seek formal exchange status. Rival BATS Trading, which has also chipped away the market share of incumbents NYSE Euronext (NYX) and Nasdaq OMX Group Inc. (NDAQ), converted in October 2008.

Direct Edge's applications, filed in May, were published Monday on the Securities and Exchange Commission's Web site, detailing the company's plan to convert its EDGA and EDGX electronic communications networks into full-fledged exchanges.

Direct Edge claimed a record 12.9% matched market share of U.S. trading in August as its chief rival, BATS Exchange, slipped to 10%.

Direct Edge's slice of the market has nearly tripled since last September, when it claimed 5% of matched U.S. stock trades. The company has built volume thanks to a competitive fee structure, enabled by its use of flash orders.

The Jersey City, N.J.-based firm anticipates approval of its applications in early 2010; it took about six months from publication to approval for BATS.

While achieving exchange status "reflects the increase in Direct Edge's market share and boosts our brand value," said O'Brien in an emailed response, it also means a reduction in clearing costs.

With 1.5 billion to 2 billion securities changing hands each day on Direct Edge's two platforms, clearing trades costs the company around $10 million per year.

Expenses could fall substantially if EDGA and EDGX are designated as exchanges, lowering costs for brokers and potentially making Direct Edge a more attractive venue.

Revenue from market data is also viewed as a key component of exchange status, though Direct Edge already collects most of this income via its ownership of the ISE Stock Exchange, acquired in December.

That deal gave the International Securities Exchange, an options platform owned by Deutsche Boerse (DB1.XE), a 31.5% stake in Direct Edge. Other owners include Knight Capital Group Inc. (NITE), Citadel Derivatives Group, Goldman Sachs Group Inc. (GS) and JPMorgan Chase & Co. (JPM).

 
   SEC To Address Flash Trading

The practice of flash trading gives a select group of market participants a fraction of a second to act on unfilled stock orders before they're routed to other exchanges, and has drawn criticism in recent months from lawmakers and regulators.

Nasdaq OMX and BATS voluntarily dropped their versions of flash orders this month, making Direct Edge the only major U.S. platform still offering the practice.

On Thursday the SEC plans to address the flash trading issue with a proposal that would essentially "prohibit the practice of displaying marketable flash orders," according to an announcement posted on its Web site last week.

While O'Brien has argued in favor of the practice, he maintains that a ban on flash order types wouldn't have much of an impact on Direct Edge's overall business - the company estimates that flash orders, while profitable, represent only about 5.5% of its total matched trade volume.

"We trust [the SEC] will not rush to judgment, will garner as much data as possible and seek constructive input from the industry and investors," O'Brien said Monday.

-By Jacob Bunge, Dow Jones Newswires; (312) 750 4117; jacob.bunge@dowjones.com