BATS Exchange Gains SEC's Approval

Big Board, Nasdaq
Face Competition
From Upstart Firm

By SERENA NG and AARON LUCCHETTI
August 19, 2008

BATS Trading Inc. received approval from the Securities and Exchange Commission to operate a stock exchange that will compete more directly with NYSE Euronext's New York Stock Exchange and Nasdaq OMX Group Inc.'s Nasdaq Stock Market.

Closely held BATS, of Kansas City, Mo., says the BATS Exchange will open in about two months. The company already trades about 10% of the share activity on NYSE and Nasdaq-listed stocks, combined, illustrating the ability of upstart stock markets to take business away from established exchanges that have gone public and focused more on profits.

Launched in January 2006, BATS's electronic trading network has grown quickly by offering heavy discounts on trading fees and promises of faster execution of buy and sell orders. Its owners include affiliates of large banks and Wall Street brokers, including Citigroup Inc., Credit Suisse Group, Deutsche Bank AG, Lehman Brothers Holdings Inc. and Morgan Stanley. It also counts more than 340 firms as subscribers.

BATS, an acronym for Better Alternative Trading System, filed for exchange status in November 2007 after working on the application since early last year.

Operating as an exchange will enable BATS to send out price quotes more quickly and directly to customers. As an electronic communication network, or ECN, it currently disseminates quotes via the National Stock Exchange and the ISE Stock Exchange, a method that some say led to small delays.

"Our timeliness will improve dramatically" as an exchange, said Joe Ratterman, chief executive of BATS. "Our market share is starting to rival other exchanges, and it makes sense to be on the same playing field as our competitors." ECNs traditionally were "not mentioned in the same sentences as exchanges...we were like second-class citizens," Mr. Ratterman added.

BATS executives expect becoming an exchange will help the firm increase market share by three to five percentage points by the end of this year. Its longer-term goal is to reach 25% market share, making it much more of a threat to the established exchanges. In July, BATS traded an average of 969 million shares per day, which compares with the 2.9 billion U.S. shares that Nasdaq traded daily that month and 3.7 billion at the NYSE. Those figures don't count the significant portion of trading activity that brokers conduct off exchanges.

An NYSE spokesman said "we welcome the competition," while a Nasdaq spokeswoman declined to comment.

BATS was founded by David Cummings, a computer programmer who was successful at developing trading strategies. BATS first began trading Nasdaq-listed stocks and later expanded to NYSE stocks.

"Anyone who can come up with 10% market share in two years is obviously a threat" to the larger exchanges, notes Michael Henry, a senior executive in the capital-markets practice at Accenture, the consulting firm. He adds that smaller trading networks, many of which are backed by banks, are claiming to be more nimble than large players at seizing market opportunities.

When it becomes an exchange, BATS may endure more regulatory requirements that slow down certain projects, however. It is adding about a dozen employees to increase its regulatory presence in order to become an exchange.