By David Zeiler
Just as a wave of mergers and acquisitions among the world's major bourses has raised regulatory concerns, a feisty challenger, BATS Global Markets, has announced plans to enter the stock listings business by year's end.
As an Electronic Communication Network (ECN), BATS currently can conduct trades of stocks listed on other exchanges but has no stock listings of its own. As another primary U.S. market, BATS would compete directly with NYSE Euronext (NYSE:NYX) and Nasdaq OMX Group Inc. (NASDAQ:NDAQ) for listings of publicly traded U.S. companies.
Its timing couldn't be better. A merger proposed in February between the Deustche Börse AG (OTCPK:DBOEY) and the NYSE Euronext would create an exchange nearly four times bigger than any rival. News of that deal drove Nasdaq to consider a counter-bid for NYSE Euronext, which if successful would leave just one U.S. listing market.
"I've heard from a number of customers that would make them feel very uncomfortable about having a monopoly in the U.S.," BATS Chief Executive Joe Ratterman told Reuters. "If Nasdaq were to have any success there, I think the industry would demand a real alternative to the monopoly."
Ironically, it was the threat of ECNs over the last decade that started the merger madness among the large bourses. The ECNs had eaten significantly into the trading volume of the NYSE and Nasdaq. In 2005, the big two fought back: Nasdaq bought Instinet Group Inc., which had snared 25% of U.S. electronic trades, and NYSE bought Archipelago Holdings Inc., which had grabbed 23.5%.
That very year, BATS Global Markets launched. Since then, the Kansas City, MO-based BATS has grown to become the third-largest U.S. exchange, accounting for about 10% of all trades. As an ECN, it has attracted business with lower fees and a faster trading system. And while many may not have heard of BATS Global Markets, some of its biggest shareholders aren't so obscure: Citigroup Inc. (NYSE:C), Credit Suisse Group AG (NYSE:CS), Bank of America Corporation (NYSE:BAC), Morgan Stanley (NYSE:MS) and Getco.
(The BATS name, by the way, has nothing to do with winged creatures of the night, but is an acronym for Better Alternative Trading System.)
BATS has mulled entering the listings market for two years. "This is going after the fat part of the curve, or the bread and butter for Nasdaq and NYSE," Ratterman told Reuters.
But offering listings presents BATS with a daunting challenge: The need to lure companies away from the long-established brands of NYSE and Nasdaq. Ratterman told the Kansas City Star that his strategy involves providing better service and support.
It will also involve price. Although BATS has not yet supplied details, it is expected to offer a simpler, flat pricing model. Both of the incumbent exchanges charge initial listing fees as well as annual fees based on such factors as shares outstanding; both also roll additional services into the price.
"Some issuers see a conflict between the duty to provide comprehensive market data with efforts to ‘upsell' to other products," Timothy Quast, managing director at ModernIR (an adviser to issuers), told the Financial Times. "Many wouldn't mind seeing a cheaper option with those things separated."
Since few companies would be likely to jump ship, at least initially, from either of the two major venues to list on the relatively obscure BATS exchange, it's likely the newcomer would offer dual listings. It also will probably try for a piece of the IPO market.
Ratterman said BATS will have no target sector when it starts adding listings in the fourth quarter. "Any firm that wants a listing in the U.S. will be open to us," he told Reuters.
Adding listings is just the latest expansion of its business BATS has undertaken this year; in February it announced plans to merge with another ECN -- Chi-X Europe -- in a share swap. That deal is expected to close by mid-year. The combined operations of Chi-X and BATS (Chi-X now conducts 16% of European trades, and BATS 5.6%) will account for more trading of European shares than the London Stock Exchange Group PLC.
The new entity, BATS Chi-X Europe, is eventually expected to file for an IPO. BATS hired underwriters in January to explore such a move. Ratterman told Reuters that if BATS is successful with its listings venture in the United States, it would consider expanding it to Europe as well.
And beyond its European plans, BATS' ambitions extend to yet a third continent: It's already begun to explore setting up a trading operation in Brazil.
Ratterman seems as surprised by how far BATS has come as anyone. "We were going in to slay the dragons - NYSE and Nasdaq - and we were just heads down, plugging away at that," he told the FT. "Then we looked up two years later and we did 2 billion shares [in trading volume]. We were also a quarter of the size of the LSE and -- holy cow -- I had no idea we'd do that."