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In this piece from 10th Man, author Jared Dillian discusses how the ETF revolution is less about ETFs and more about indexing; about how people have come to view stocks less as stocks and more as blobs of stocks.

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March 15, 2007

BATS Says It Wants to Apply To SEC for Exchange Status

By Peter Chapman

BATS, the fast-growing ECN, plans to become a stock exchange.

"We have begun the process of assembling an exchange application," BATS chief executive Dave Cummings told Traders Magazine. "We will file it at the appropriate time."

The ECN launched in January 2006, but has since rocketed into the upper tiers of trading, matching about 200 million shares per day.

It is now the fourth-largest market center, as measured by orders matched, trailing only the New York Stock Exchange, Nasdaq and NYSE Arca.

Cummings expects BATS to be matching 1 billion shares per day by the end of the year. At that level, it makes more sense to be a stock exchange rather than an ECN, according to Cummings.

"Below 200 million shares per day, it is a huge advantage to be an ECN-to be nimble," Cummings says. "Between 200 million and 500 million, you can go either way. But when you expect to be north of 500 million shares, it's advantageous to be an exchange."

The primary additional economic benefit of exchange status is the ability to earn market data revenues, Cummings says.

As an exchange, though, BATS would incur added costs to support a regulatory effort. Cummings believes that with technology, BATS could do the job at a cost lower than the norm.

In recent years, achieving exchange status has proved difficult. Island ECN applied to the Securities and Exchange Commission for the right to operate as an exchange, but was never approved. It took Nasdaq five years to become a stock exchange.

Cummings acknowledges that the process can be difficult and lengthy, and adds that BATS is "open to considering a merger with a regional, if the proper terms can be struck."