BATS Exchange plans to allow participant firms to register as market makers on its exchange. BATS is currently operating as an ECN but intends to make the switch to an exchange in October.
Joe Ratterman, president and CEO of BATS, said the planned market-maker designation will not confer any economic benefits or privileges on participants that become market makers. The designation, he said, is meant to ensure that liquidity providers on BATS aren’t disadvantaged compared to market makers on other exchanges. A spokesperson added that the filing, which has not yet been submitted to the Securities and Exchange Commission, is an administrative change.
Market makers “will not get preferential treatment or a preferential position within the BATS market,” Ratterman said. “All players are on the same level playing field regarding priority, parity and economics.”
Ratterman said one reason BATS is providing the market-maker designation is the SEC’s recent Emergency Order. In mid-July, the SEC imposed a temporary Emergency Order on the securities industry, requiring firms that wanted to short-sell 19 specific financial stocks, including Fannie Mae and Freddie Mac, to borrow or make arrangements with a broker to borrow the shares they planned to short before they could execute the trade. Previously, the requirements were less stringent. However, a few days after announcing its Emergency Order, the SEC granted an exception to cash and derivatives market makers in those stocks. That order expired on August 12.
“Given that the SEC considers the market-maker classification important for the lubrication of the industry, we need to make sure our users can qualify as market makers and continue to conduct their business unrestricted on BATS, whatever the orders and rules are that come of the SEC in the future,” Ratterman said. “We instituted a market-maker classification for that express purpose.”
Most equities exchanges have market-maker designations. On some, market makers that meet certain requirements have trading benefits based on their status. The New York Stock Exchange, for example, is in the process of altering the responsibilities of its designated market makers. If its proposed changes are approved by the SEC, those market makers would lose many of their earlier privileges, but in exchange for meeting specified obligations they would have trading parity with floor traders, which would enable them to trade along with the book. Other exchanges have trading performance obligations for market makers that want the ability to interact with directed orders.
Ratterman said BATS’s market-maker responsibilities will be modeled after those on the National Stock Exchange. He noted that participants must make continuous two-sided markets and register in the securities in which they want to be market makers.
BATS expects current liquidity providers on its market to become market makers. The firm declined to say how many liquidity providers it has. “We have a broad base of users that trade on our market every day and some are heavy liquidity adders,” Ratterman said. “My suspicion is every one of those firms would sign up to be a market maker in the securities they trade.” BATS has a total of 360 subscribers.