Electronic stock market operator Direct Edge secured approval from U.S. securities regulators Friday to convert its two stock trading platforms to full-fledged exchanges, putting it on more equal footing with much-larger rivals.

The company plans to relaunch its EDGA and EDGX trading platforms as exchanges in June alongside a migration to a new technology platform aimed at speeding trade execution times.

"Obviously we're excited to be America's newest stock exchange, but this is more than a transformation for Direct Edge. We're really transforming our software and our infrastructure, and that's what's really exciting," William O'Brien, chief executive, told Dow Jones Newswires.

"This is going to significantly improve the quality of our products and enable us to roll out new products and new services," he said.

Direct Edge, Jersey City, N.J., in February claimed about 9.6% of the U.S. cash equities market, down from a high of around 13% last August. NYSE Euronext (NYX) had market share of 27.3% and Nasdaq OMX Group Inc. (NDAQ) drew 24.6% for the month, while BATS had a 10.7% share on its single exchange platform.

Direct Edge's planned conversion to exchange status will give the company flexibility to tap into new asset classes and geographies while reducing clearing costs and allowing Direct Edge to offer more competitive pricing for stock trades. Evolving into an exchange operator will allow Direct Edge to reduce its clearing costs, estimated in 2009 to total around $10 million per year, while eliminating duplicative costs associated with developing the exchange effort alongside operating its electronic markets in their current form.

O'Brien said that customer testing is set to begin in April, with the first stocks beginning to trade in mid-May and a full launch seen in early June. Direct Edge is likely to announce new pricing schemes ahead of the conversion, O'Brien said.

Key to Direct Edge's rise over the past two years has been its ELP program, a form of so-called flash order functionality, which gives market participants on the platform the ability to act on an unfilled stock order before it is routed out to another market to be filled. Such orders have typically represented a small amount of Direct Edge's overall volume, but their profitability was seen helping the company maintain more competitive pricing.

Flash order types stirred controversy last summer, when lawmakers criticized the practice for giving some market participants a potential advantage over others. In October the Securities and Exchange Commission voted on a proposal to ban the practice, and Direct Edge remains the only major stock market operator to offer the function.

Direct Edge officials have said use of the ELP program has been on the decline, partly a result of its larger market share. Others in the market argued that participants have backed away from flash order types and similar practices as the SEC is expected to issue a ban on the practice in the coming months.

Direct Edge began life as Attain ECN, an electronic platform that was sold to Knight Capital Group Inc. (NITE) in 2005. The International Securities Exchange, an options platform owned by Deutsche Boerse (DB1.XE), took a 31.5% stake in Direct Edge in late 2008, alongside other stakeholders Citadel Derivatives Group, Goldman Sachs Group Inc. (GS) and JPMorgan Chase & Co. (JPM).

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