BATS Aims to Mirror Equities Success in Options
Exchange Launch Expected in Early 2010
Traders Magazine Online News, July 10, 2009
A year after becoming an equities exchange, BATS plans to grab a chunk of the options market through aggressive pricing that appeals to some of the same automated liquidity-providing firms that helped make it the third-largest exchange operator in U.S. equities.
"Compared to our competitors in this space, we're lean, based on our direct monthly expenses and capital outlay to get into options, so we're operating on a different scale than other exchanges," said Joe Ratterman, CEO of BATS Exchange. "Because of that, we can be aggressively priced."
BATS Options will have maker-taker pricing in a price-time market model. The exchange hasn't yet announced its pricing, but will target all options classes, and not just those quoted in penny increments, Ratterman said. He does not think the exchange will offer different pricing for penny-quoted and non-penny-quoted options, but noted that the final decision hasn't yet been made. In equities BATS has sometimes used inverted maker-taker pricing to attract volume.
"If history is any guide, they're very aggressive with their pricing metrics, and will enter the options space with a pricing structure that will undercut the competition and will attract interest and competition from trading entities," said Andy Nybo, a principal at research firm TABB Group.
BATS's ambitions for options are aggressive. "We wouldn't be going into this market if there wasn't a big opportunity for BATS to come in, make improvements and gain market share," Ratterman said. "U.S. equities was one of the most competitive markets in the world and we managed to do very well when we broke into that space. There's nothing to keep us from being successful in options."
Ratterman expects BATS's eventual options market share to equal its share in equities. In June, BATS accounted for 10.7 percent of equities volume. BATS, formerly an ECN, opened for trading in January 2006 and became an exchange in August 2008.
BATS intends to build its options market by appealing to a range of investors, including institutions, retail brokers and market-making firms. "We'll attract as much diversity [of flow] as possible," Ratterman said. "We have a fair and open model in the equities world and will have that in options."
But the exchange's strong suit is its appeal to automated market makers. "The performance metrics of our system have traditionally appealed to automated market-making firms because of the low-risk characteristics of their trading on our markets, and the consistency and performance of our system," Ratterman said. "It's likely we'll have as much influence on the options side."
TABB's Nybo notes that BATS's reputation for having a strong technology platform and low-latency infrastructure will boost its prospects in options. "They are looking to attract quantitative trading firms using low-latency, high-frequency strategies and those that arbitrage fleeting price discrepancies," he said.
BATS will file the rule set for its new market "shortly," according to Ratterman. He said the launch of BATS Options is targeted for January or February of next year, subject to approval by the Securities and Exchange Commission.
BATS Options will join a growing marketplace populated by seven options exchanges. Last month, 296 million equity options contracts changed hands, up 5.6 percent over the previous June's volume. The industry traded a record 3.3 billion equity options contracts in 2008, an increase of 26.7 percent over 2007's record volume. This year is on pace to exceed last year's volume.
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