Electronic exchange operators BATS Global Markets and Direct Edge Holdings announced Monday they would merge to create the second-largest stock exchange in the United States.
The proposed agreement unites two companies originally created by banks and trading firms to compete with the major US exchanges and highly suited to high-speed trading.
Currently, the New York Stock Exchange accounts for 23 percent of all the shares traded daily in the US, compared with 18 percent for the Nasdaq Stock Market.
BATS and Direct Edge represented 20.6 percent of shares traded in the US so far this month.
The merger will keep the four US equity exchanges run by BATS and Direct Edge in operation: the BATS BZX and BYX Exchanges and the Direct Edge EDGX and EDGA exchanges.
The transaction is expected to be completed in the first half of 2014, subject to regulatory approvals, BATS and Direct Edge said in a statement.
The terms of the deal were not disclosed.
"This agreement is an important milestone for the US 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," Joe Ratterman, BATS chief executive, said in the statement.
Ratterman will keep the CEO role in the combined company operating under BATS Global Markets, while Direct Edge CEO William O'Brien will be president.
The new entity exclusively will use the proprietary BATS technology and will be headquartered near Kansas City, Missouri, where BATS is currently based.
It will have additional offices in New York and London, and in Jersey City, New Jersey, the location of Direct Edge's headquarters.
BATS also operates a US equity options market and BATS Chi-X Europe, the largest pan-European equities exchange by market share and value traded.
In March 2012, BATS attempted an initial public offering, but the market debut turned into a fiasco after a technology glitch forced the exchange to halt trading in its own shares.
Also last year, Direct Edge was in talks to be acquired by Canadian exchange operator TMX Group but they fizzled and TMX itself was snapped up by a group of Canadian investors.
For Gregori Volokhine, chief of strategy at Meeschaert New York, their merger "comes a little by necessity". With competition rising from many electronic markets, BATS and Direct Edge can't survive on their own.
"If you want to buy a share of Apple or Facebook, there are about 60 marketplaces in the US between the public exchanges and the 'dark pools,'" he said.
"Dark pools" are private markets run by banks and broker dealers where investors buy and sell stocks anonymously and trading activity details are concealed.
Volokhine said the rise in competition had caused "sharp pressure on transaction prices and commissions, and thus on margins. Therefore it's important to reach a critical mass, which was what happened with NYSE Euronext."
NYSE is being taken over by electronic trading upstart IntercontinentalExchange in a deal announced last December.
"It is a tough environment and customers count on exchanges to help them navigate through this," O'Brien, the Direct Edge CEO, acknowledged in a CNBC interview.
Volokhine likened the industry's consolidation to the "Pac-Man" game that has left the NYSE with the largest trading volume in the US.
The merger of BATS and Direct Edge should hasten that consolidation and send Nasdaq scurrying to find a partner.
"Being number-three in the market isn't really a good spot, especially after what happened" last week, he said.
Last Thursday a technology glitch forced Nasdaq to suspend trade for more than three hours.