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September 20, 2011

BATS Aborts Directed Orders

By Peter Chapman

BATS Options, barely a month after receiving approval from the Securities and Exchange Commission, scuttled its controversial directed order program. The move may only be temporary, however.

"We will retract the currently approved rule until we are confident that the final result will, in fact, make markets better," BATS chief executive Joe Ratterman told exchange members in a memorandum in July.

The program would have allowed brokers to direct orders to their or other firms' market-making divisions without exposing the orders to other exchange members. That prompted an outcry from members of the options industry that BATS was seeking to circumvent long-held exposure rules.

BATS originally filed for the program in early December of last year.

The program involved price improvement for customer orders. BATS argued that that was a better way of transferring value to retail customers than the practice of payment for order flow. Market makers typically pay their brokerage customers for order flow.

In a filing with the SEC, BATS noted that ongoing discussions with its members have convinced it to scrap the project for now. The exchange operator will "continue analyzing potential refinements that may better achieve the exchange's goal," it told the regulator.

In the memo, Ratterman said: "Some see our directed order program as facilitating a potential trend toward increased internalization, and others have highlighted that there may be a disincentive for market makers that don't currently have customer relationships. Of course, it is difficult to determine the actual outcome without implementing the pilot program, but we certainly agree that outcomes like these are not desirable (nor are they the intent of the program). As a result, we will continue collaborating with our customers on possible design improvements in the weeks ahead, and we would like to thank our customers for the feedback and support they provided over the last several months."

 

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