Securities exchange operator BATS Global Markets Inc. of Kansas City, Mo., is buying rival Direct Edge LLC, making the combined firm the No. 2 market in terms of shares traded in the U.S. after the New York Stock Exchange.

The combination unites two companies built by trading firms and banks to handle rapid, electronic trading. All four exchanges owned by the merged company will run on BATs proprietary technology, which users say has handled market volatility more effectively than the traditional exchanges.

The four U.S. equity exchanges run by BATS and Direct Edge will remain in operation -- the BATS BZX and BYX Exchanges and the Direct Edge EDGX and EDGA Exchanges. BATS also operates a pan-European electronic exchange market.

Direct Edge is the fourth-biggest U.S. market operator, handling almost 10 per cent of the daily trading in American stocks. Its owners include Wall Street investment banking giant Goldman Sachs and KCG Holdings.

Will control more than 20% of market

The combined exchanges will handle 20.6 per cent of the overall market, according to BATS, making it larger than Nasdaq.

"This agreement is an important milestone for the U.S. equities market and other markets around the globe as it will combine two organizations that have been innovative in creating a more competitive marketplace to benefit all investors," said BATS CEO Joe Ratterman. 

The Nasdaq had a three-hour trading freeze last Thursday caused by technical glitch and has come under criticism for its inability to handle electronic trading.

Direct Edge was in talks last year to be acquired by TMX Group Inc., the company that owns the Toronto Stock Exchange, but the deal fizzled after a group of Canadian banks and investment firms bought TMX.

There has been a wave of consolidation among trading markets in recent years, including Intercontinental Exchange Inc. buying NYSE Euronext, in a deal valued at $10.4 billion US, and the Hong Kong Exchanges & Clearing buying the London Metal Exchange for $2.2 billion.

No terms of the BATS deal were released, but it is expected to close in the first half of next year.