UPDATE 2-Direct Edge to take on Brazil's BM&FBovespa

* Direct Edge sees launch by 2012 4th quarter

* To trade equities, ETFs and depositary receipts

* Continues the splintering of marketplaces globally

* U.S. exchange handles 10 percent of U.S. stock trades (Adds CEO and analyst comments; Bovespa shares, background on Edge, byline)

By Guillermo Parra-Bernal and Jonathan Spicer

SAO PAULO/NEW YORK, Nov 21 (Reuters) - Direct Edge, a private exchange operator that has taken on the NYSE and Nasdaq with some success in the United States, now plans to open a bourse in Brazil to challenge incumbent BM&FBovespa (BVMF3.SA).

The company, whose owners include Goldman Sachs Group (GS.N), said on Monday it expects to launch the all-electronic exchange by the fourth quarter of 2012 to take advantage of Brazil's fast-growing financial markets and open regulatory framework.

The plan puts new pressure on Brazil's BM&FBovespa (BVMF3.SA), the world's third-largest exchange operator, whose stock has suffered as the threat of competition has become more realistic over the past year.

The plan is for Direct Edge Brazil, a new market headquartered in Rio de Janeiro, to offer trading of all Brazilian equities, exchange-traded funds and depositary receipts. There is still no set plan for the clearing of trades, which could make things difficult for Direct Edge.

The company is one of a handful of private exchange operators that have managed to eat into the market shares of public, national exchanges in North America and Europe in the last five years, splintering marketplaces globally and driving down trading fees.

The large banks and trading companies that run such exchanges, including BATS Global Markets and Chi-X Europe, want to pressure incumbents to keep trading fees low and to spur the development of better trading technology.

JPMorgan Chase & Co (JPM.N) and Citadel Investment Group are also among Direct Edge's shareholders.

In the United States, the exchange operator matches about 10 percent of all cash equity trading, a thorn in the sides of incumbents NYSE Euronext (NYX.N) and Nasdaq OMX Group Inc (NDAQ.O).

Since its U.S. launch in 2007, Direct Edge has won and retained the market share in part by offering big rebates to traders to attract a stable pool of liquidity.

In Brazil, the aim is to be "different, better and special from a customer perspective," Direct Edge Chief Executive William O'Brien said in an interview, pointing to pricing and technology as competitive inroads.

There is "a pretty wide disparity" between the fees BM&FBovespa charges traders relative to other national markets, O'Brien said. The Direct Edge strategy in Brazil will be similar to that in the United States, he added.

QUESTION OF CLEARING

BM&FBovespa, which owns the CLBC clearinghouse, is likely reluctant to open its infrastructure to competitors -- a possibly steep barrier for Direct Edge, which will need infrastructure to clear and guarantee the trades it executes.

"Even though we think competition will be a reality in the future, establishing a new cash equities business in Brazil will be challenging for Direct Edge, particularly finding a clearing-service provider, since BM&FBovespa's CBLC does not seem to be an alternative," Itaú BBA analysts said in a note to clients.

Direct Edge approached BM&FBovespa about using its clearinghouse, but there was nothing to announce at this time, O'Brien said. The company will consider buying, building and partnering as it plots what to do, he added.

The New Jersey-based company plans to announce possible partnerships for a platform for clearing soon, Valor Economico newspaper said, quoting O'Brien. The newspaper earlier reported the new exchange.

Direct Edge is the second non-Brazil exchange operator seeking to enter a market where trading of derivatives, stocks and bonds is growing rapidly. BATS and local partner Claritas have announced plans to open a bourse in Brazil, further pressuring BM&FBovespa.

The threat of competition has weighed on BM&FBovespa's performance this year, helping to send its shares down 16 percent. It shares were off 0.5 percent on Monday. The Sao Paulo-based exchange company is currently Brazil's sole registered bourse.

Other potential locally-based rivals could also seek authorization to operate in financial trading, Valor reported.

The Bolsa de Valores Bahia Sergipe e Alagoas, known as Bovesba, which has been shut for years, could seek permission from regulators to start operations in the contract for difference, or CFD, markets, the newspaper said, citing executives. CFD is a type of swap.

Direct Edge was spun off by Knight Capital Group (KCG.N) in 2007 as an electronic communications network, or ECN. It became a formal U.S. exchange last year. (Reporting by Guillermo Parra-Bernal in Sao Paulo and Jonathan Spicer in New York; Editing by Lisa Von Ahn, Dave Zimmerman and John Wallace)