Group Co.
The REAL Exchange Disruptor Strikes Again!
Traders Magazine Online News, May 30, 2017
From its inception last decade, Bats has been a true disruptor, blending innovation, technological competence, and business acumen to deliver a platform that helped drive down the net cost of trading to its clients. Unlike other firms that claim to be disrupting the exchange model, Bats delivered and continues to do so. Instead of pointing fingers at “bogeyman” issues like HFT predation, order type opacity and co-location (and doing little about them), Bats, once again, has proposed an innovation that could provide a major cost reduction to the industry. Their proposal to offer as much as an 80% discount to matched trades in the closing auction should be welcomed.
Why am I so positive about this proposal? The answer is that it is almost a perfect “win-win” for the industry. It should have zero impact on price discovery, yet could cut over $40 million in fees paid by brokers to exchanges annually. In addition, in extreme situations, it positions Bats as a potential backup utility when technology issues disable one of the other primary listing venues. I will explain how below, but want to provide some historical context first.
When Bats started, the equity markets were at the tail end of a wave of competition followed by consolidation. There were more than a dozen electronic market centers started in the 1990s that displayed and matched orders like exchanges do today. Called ECNs (Electronic Communication Networks) they were a form of ATS (Alternative Trading System) that brokers could use to display orders or access resting liquidity. In the 2000s, however, merger activity threatened to suppress competition. Instinet bought Island, forming the largest ECN, called INET. Nasdaq followed this by purchasing BRUT, which had earlier been created out of a merger with Strike technologies. Within a year, Nasdaq followed up their Brut purchase by buying INET, which they used as their core matching technology. NYSE, at around the same time, purchased ARCA, which itself was formed from a merger with the Redibook ECN and a purchase of the Pacific Stock Exchange. After this wave of consolidation, many industry participants were afraid that Nasdaq and NYSE would form a “duopoly” with the ability to raise costs and hurt broker’s profitability. Into that breach, jumped two sets of entrepreneurs: Dave Cummings, who formed BATS and received backing from many industry heavyweights and the duo of Bryan Harkins and Bill O’Brien who formed DirectEdge from the skeleton of the Attain ECN with the backing of Goldman, Citadel and Knight. Both ATS’s were highly innovative, and now are part of the Bats exchange group. While Direct Edge pioneered the first inverted (taker/maker) market, the original Bats was the most aggressive disruptor.
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