In a bid to garner market share and make amends for a recent billing snafu, BATS Options will offer loss leader pricing for some orders next month.
"We’re hoping to turn a mistake into a competitive advantage," Jeromee Johnson, head of BATS’ options exchange, told Traders Magazine.
Beginning in October, traders whose orders are sent to BATS but not executed will catch a break when those orders are routed on to other exchanges.
Today, traders pay BATS the second exchange’s take fee plus 5 cents. So, if the exchange charges 45 cents per contract, the trader would pay BATS 50 cents per contract.
Under the new plan, they will pay BATS some amount below the second exchange’s take fee. So, if the exchange charges 45 cents per contract, the trader would pay BATS no more than 44 cents. BATS would not say how much of a discount the trader will get.
Although BATS will take a loss on the routed orders, it hopes the move will encourage traders to send more orders its way.
"We’ll subsidize the cost of accessing liquidity at other venues in return for getting a first look at those orders," Johnson explained.
The exec would not provide any details about the pricing change, but indicated it might not be just a short-term special deal. A similar program called BATS PLUS has operated on BATS’ equities exchange for some time.
At least one trading executive is intrigued with BATS’ pricing plan, but notes the size of the discount will determine the success of the plan. "It really depends on how much money," Kevin Fischer, head of options block trading at Interactive Brokers/Timber Hill, said.
"So many exchanges are making so many fee changes so frequently that you have to take into consideration the cost of all the programming. In some cases, they’re making very, very marginal changes where it is not worth it to do the programming."
Fischer notes, however, that with BATS’ small market share and lack of liquidity that the exchange needs to do something to get on traders’ radar.
While the pricing scheme is intended to help the industry’s newest and smallest exchange lift its market share above its current half percent, it comes in the wake of a billing blunder related to orders routed away from BATS.
In August, the exchange operator, as well as some of its customers, discovered BATS overcharged those customers for orders routed to other exchanges. The aggregate amount was in the tens of thousands of dollars, according to Johnson.
The error, which took nearly three weeks to resolve, caused those firms affected to cease routing orders to BATS. That hurt the young exchange’s market share, which had been growing steadily since its late February launch. BATS’ market share in options hit 1.2 percent in July, only to fall to about a half percent in August.
Most of the overage was caused by overcharging those customers whose orders first checked the BATS book before routing away. The exchange operator mistakenly applied the higher fee charged for those orders that pass through BATS without stopping to check the book.
"We significantly overbilled some clients," Johnson said. "We gave ourselves a black eye."
The exec says those customers affected by the billing problem have resumed sending orders to the exchange, but are asking for a daily accounting of their charges.
