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Tuesday, February 28, 2012 9:54:59 AM

BATS ready to break its silence

US-based market operator BATS Global Markets has revealed plans to enter at least two new markets by 2014 and is considering broadening the asset classes it offers.

The firm’s growth strategy was revealed in the latest disclosures made to US regulator the Securities and Exchange Commission (SEC) on 23 February as part of its IPO filing. BATS Global Markets announced its intention to list in May last year.

The filing confirms BATS’ intention to start trading in two new markets, citing Brazil and Canada, within the next two years.

While the firm has not announced any formal plans for launching in Canada, it has partnered with asset management firm Claritas to explore opportunities in the Brazilian market. Rival US exchange Direct Edge has also laid out plans to launch in Brazil by the end of this year, pending regulatory approval.

However, BATS and others could face an uphill struggle to get established in Brazil after Edemir Pinto, CEO of domestic exchange BM&F Bovespa, stated that he would not allow competing trading venues access to the firm’s vertically-integrated clearing house. In theory, BATS would need to build or buy-in its own clearing infrastructure in Brazil, but the process would be costly and time-consuming.

Although BATS has remained cagey about the precise timing of the IPO, the firm is understood to be impatient to end its extended pre-float ‘silent period’ in order to move forward with its expansion plans. Press speculation has slated a US$100 million deal to hit the road between 5-19 March. While many of the brokers that took out stakes in the early stages of the firm’s development are looking for a return in their investment, management is keen to retain as much cash as possible from the transaction to fund future growth.

Noting the relatively benign market conditions, one insider said the IPO would likely take place “sooner rather than later, as we’re not interested in a first day pop”.  Underwriters for the deal include Rosenblatt Securities, a niche New York-based broker that has recently expanded its investment banking suite and was one of the firms that supported the Chicago Board Options Exchange’s IPO last year.

New asset classes 

The exchange operator also said it was considering an expansion into new instruments such as US treasury securities and other fixed income products, FX and US derivatives.

In Europe, where BATS completed the purchase of multilateral trading facility (MTF) Chi-X Europe on 1 December, the Kansas City-headquartered exchange operator is also looking to broaden its value proposition. The firm has run its own MTF in Europe since 2008, but its 23 February SEC filing also said it aimed to register as an exchange during 2012, potentially allowing it to compete with the London Stock Exchange, Nasdaq OMX Nordic, Deutsche Borse and NYSE Euronext for primary listings. The UK competition authorities investigation into the deal is one of the reasons for the delay to the IPO, which had been expected in Q2/Q3 last year. 

BATS Chi-X Europe, as the joint entity is now known, traded 24.6% worth of pan-European equity trading last month, making it the region’s largest trading venue, according to figures from data vendor Thomson Reuters.

BATS Chi-X Europe intends to retain both MTFs’ lit and dark pools but migrate to the same technology platform by 30 April. The firm is expected to unveil execution tariffs in the coming weeks. At the start of this year, both Chi-X and BATS Europe stole a march on other trading venues in the region with the introduction of interoperability schemes that allow members to direct trades to any of four pan-European central counterparties – EMCF, SIX x-clear, LCH.Clearnet or EuroCCP.

In the US, BATS has already converted its two equity markets – BZX and BYX – from electronic communications networks into exchanges. Combined, the two markets account for around 11% of monthly US equity trading. BZX received authorisation by the SEC to become a listings venue in December last year and listed its first instruments – a series of iShares exchange-traded funds (ETFs) – on 24 January.

Liquidity-seeking strategies 

In an attempt to grow trading in BATS-listed instruments, the exchange has launched a competitive liquidity provider scheme, which involves selected market-making firms competing for a daily reward by posting quotes in a stock or exchange-traded product.

BATS claims the scheme is already a success. By offering market makers the opportunity to effectively trade for free – if they manage to offer prices closest to the best bid and offer more consistently than their peers – BATS has reduced spreads on their ETFs to as little as a penny.

The first BATS stock listing looks likely to be the firm itself. The firm admits that further listings are likely to come from the small and mid-cap sector, typically from new floats rather than listed firms switching from existing exchanges.

BATS has also left the possibility of further acquisitions on the table. “We intend to seek additional opportunities to grow our business through strategic alliances or acquisitions that are complementary to our business or enable us to enter new markets or provide new products or services,” read the SEC filing.

BATS was founded in 2005 by Dave Cummings, who brought 12 colleagues, including current CEO Joe Ratterman, from his previous company, Kansas-based automated trading firm Tradebot Systems, with the aim of launching an alternative market for trading US stocks. The aim was to challenge the US stock exchange duopoly of Nasdaq and NYSE, which bought Island ECN and Arca respectively to develop their electronic order book offerings. Cummings returned to Tradebot in 2007 but still has a position as a director on the BATS board. Other current shareholders include Bank of America Merrill Lynch, Citigroup, Credit Suisse, Deutsche Bank, GETCO, J.P. Morgan, Morgan Stanley and Wedbush. 

BATS declined to comment on its future plans for growth.

Anish Puaar +44 (0)20 7397 3817 anish.puaar@thetrade.ltd.uk