December 2011 prove a landmark for BATS Global Markets. During the month, the UK Competition Commission official was expected to ink its approval of BATS’ takeover of Chi-X Europe, Europe’s largest multilateral trading facility (MTF). The new BATS Chi-X Europe will be the largest trading centre in Europe in terms of market share and notional value traded. In the first quarter of 2011, Chi-X Europe accounted for €454.6bn traded while BATS own MTF, BATS Europe, traded €171.2bn. Chi-X Europe will add a derivatives offering to the combined company through an agreement with Russell Investments.
It was also a month in which BATS Global Markets was set fair to challenge NYSE Euronext and NASDAQ OMX with a new listings service on BZX. BATS operates two stock exchanges in the US, the BZX Exchange (BZX) and the BYX Exchange (BYX), which account for around 10% to12% of all equity trading in the United States on a daily basis. BATS Listings will be headed by Brian King, who has managed client relationships at BATS for four years.
Launched from a suburb of Kansas City, Missouri, onlookers were unsure about the success and direction of BATS at its launch in 2005. Started by a handful of people and still only employing barely more than 100 worldwide, in May 2011 it filed with the SEC to raise $100m in a flotation, which some estimates say values the company at $1.1bn. The flotation will fund acquisitions and provide an exit strategy for some of its original investors, which include Getco, Credit Suisse, Morgan Stanley and Deutsche Bank among others.
Chief executive officer (CEO) Joe Ratterman’s expansion plans for BATS—originally just a simple electronic communications network—have coincided with huge upheavals in the financial markets. In October 2008, in the middle of the fallout from the Lehman Brothers crisis, it launched a multilateral trading platform, BATS Europe. At the same time on the other side of the Atlantic, it also launched BZX. Work on the European platform was complete in six months with Ratterman saying at the time: “This is a testament to our focus and determination to move at ‘BATS speed’ and the drive to simply get things done.” The platform is headed by chief executive officer Mark Hemsley.
In 2007, BATS represented around 15% the size of NASDAQ. In 2009, it represented around 55%. Today its 12% US equities market share compares with NASDAQ’s 18%. For its other businesses, US equity options market BATS Options holds around 3.8% matched market share and BATS Europe just over 5% as of October 2011.
Not content with expansion at home and in Europe, BATS is also looking further afield. The firm has set up a partnership with Claritas, a Brazilian asset management firm, to work on creating a new stock exchange in the country, with attendant clearing and depositary services. Brazil is the fourth-largest market in the world, with opportunities to challenge the incumbent stock exchanges.
It is that “better place to do business” which has been BATS’ focus with Ratterman at the helm. BATS originally stood for Better Alternative Trading System and its logo incorporates the slogan “Making Markets Better”. “The last two years have been very exciting and rewarding as we took BATS from a napkin drawing to one of the fastest-growing market centres in the nation,” he told members then. “Because our employees and investors come from the industry, we are well-positioned to help make the markets a better place to do business.”
While it is acknowledged that a listing business will add to BATS’ revenue, some believe they will find it harder to make a success of it than they did with their trading business; high-frequency trading provided a ready-made market for the trading business.
Ratterman bases his success on the technology which underpins BATS. It includes parallel routing strategies which aim to provide best execution more efficiently while accessing multiple market venues simultaneously. Several matching engines provide up to five times more capacity than required and it has kept latency low.
Ratterman has also implemented innovative pricing with BATS National Best Bid and Offer (NBBO) Setter programme, which rewards clients not just because of size but also because of actions which improve market quality. Ratterman says: “This has been such a hit on the BATS Options market that we have recently rolled it out on our two US equity exchanges as well. It’s the first of many innovations to come from BATS based on a new paradigm shift in pricing models.”
Pricing has been used as a strategy to expand. An initial aggressive fee structure that lost money on every trade in order to attract customers was successful: the firm now claims more than 300 broker-dealer customers. In October 2011, the firm began to provide rebates for firms taking liquidity from the BYX Exchange order book for all securities priced $1 or above. Customer service is one of Ratterman’s original stated aims for BATS—in 2007 Ratterman told his members: “We are listening to you, our customers. We want to be your market.”