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Exchange Approval Arrives for BATS
August 19, 2008
With approval in hand, BATS Trading said Monday that it will begin operating as an exchange in the next 60 days. The electronic communications network plans to compete directly against the Nasdaq Stock Market and New York Stock Exchange using the same no-frills, low-cost approach that made it the U.S. equities market’s third-largest venue.
Joe Ratterman, president, CEO and chairman of Kansas City-based BATS, said the Securities and Exchange Commission did not require any significant changes to the ECN’s November filing. He attributed the relatively quick ten-month process to the application’s tight adherence to precedent set by existing exchanges, as well as “our clean regulatory history as an ECN and our substantial market share.” Added Ratterman, “Our desire is to compete on the same playing field as our main competitors.”
BATS’ daily average volume in July was 1.1 billion shares and its matched market share was 10.1 percent, according to the venue. During August, its intraday market share has reached nearly 12 percent during regular trading hours.
The two-month delay will allow BATS to establish a board of directors for the exchange. Its original board, overseeing the broker-dealer behind the ECN, will remain in place and operate independently of the exchange board, Ratterman said. The broker’s sole ongoing purpose will be to route trades to other destinations.
Ratterman said BATS has built out its staff to provide regulatory oversight and surveillance, ensuring that its members observe Financial Industry Regulatory Authority (Finra) and SEC rules. Finra will “handle member exams, investigations, disciplinary actions and arbitration,” he noted.
BATS has 70 employees overall, according to Ratterman, with 15 in London preparing for the Nov. 3 launch of its European multilateral trading facility, which aims to offer a much lower cost structure than that of other platforms. “We like to do things with the fewest numbers of the right people possible,” he added.
Documents have been circulating for a few weeks that enable current BATS members to become exchange members through a simple waive-in process, according to Ratterman. In an e-mail sent to subscribers, he noted that “we have already received a majority of them back, signed and approved.”
The BATS Exchange will report trades through the Consolidated Tape Association using the identifier “Z,” noted Ratterman. The ECN currently uses the International Securities Exchange and National Stock Exchange to print trades.
Miranda Mizen, senior consultant at New York-based Tabb Group, said she expects BATS to use its new-found exchange status to market its direct quote-distribution feed. Some clients already use the feed, which may only be microseconds faster than the consolidated tape, but “the quicker you can get to the tape, the quicker you get back to someone’s smart-order router calculation and the more likely your venue will execute the next trade, given you have best price,” Mizen said.
In addition, the consolidated tape provides only Level 1 quotes, whereas direct feeds can provide full depth of book--data BATS has already begun providing for free through online portals such as Yahoo Finance. Nasdaq and NYSE have touted similar offerings via Internet portals, which pay the exchanges for the data.
The issue of market data costs reemerged July 4, when the SEC issued a proposed order permitting NYSE Arca, a former ECN, to charge for the data. Mizen noted that BATS has publicly stated it will use its new exchange status to apply downward pressure on those fees.
