Jan 2014

Bats Global Markets Featured in New York Times article, “A Stock Exchange Expands Its Global Reach”

New York Times

The face of the global stock market used to be the classically proportioned exchange building on Wall Street.

In the future, it may well be a squat suburban office building in Lenexa, Kan., outside Kansas City, where BATS Global Markets is based.

While the New York Stock Exchange has recently been swallowed up by the InterContinental Exchange, a company that gets most of its revenue from trading derivatives, BATS, which was founded in 2005, has been doubling down on plain-vanilla stock trading and global expansion. That steady business has quietly moved it closer to the top of the list of the largest stock exchange operators in the world in terms of the value of shares traded.

In the coming months, BATS is set to complete its merger with another upstart company, Direct Edge, in a deal that will turn it into what will most likely be the biggest stock exchange company in the United States (at least on some trading days).

In Europe, BATS is already the largest exchange after a rapid, and mostly overlooked, ascent that now has it hosting trading in nearly all the big economies on the Continent. As it continues to push in those existing markets, it is looking to take on other parts of the globe, including Canada and Japan.

Everywhere it goes, BATS is aiming to serve as an evangelist for the American way of trading, focusing on low costs, competition and high-speed trading.

In the rest of the world, older exchanges and some established trading firms have pointed to the recent market crashes and problems that have occurred in the United States as evidence of flaws in the American model. But BATS is winning over enough traders and banks to keep the expansion going.

Paul Squires, the head of trading at AXA Investment Management in London, said that initially he was skeptical of BATS and the changes it brought to Europe, including the opening it provided for the much-maligned high-speed trading sector.

Over time, though, Mr. Squires said that the company had been more responsive to his questions and concerns than the old exchanges ever were. He has also found BATS to be half or less of the cost of the big exchanges.

"We've overcome that psychological, initial judgment," Mr. Squires said. "Now it doesn't bother me at all if there is an Americanization of our markets."

BATS has been taking advantage of the difficult conditions prevailing in the stock world, where daily trading volumes have been falling for a long time, along with the fees that exchanges are able to charge. That has made it a difficult business for historic companies with staff and infrastructure built up during an earlier era.

BATS has a relatively small staff of about 170 people and a basic technology that can be exported anywhere. It has succeeded with this formula despite the company's most embarrassing moment, when it had to call off its own initial public offering in 2012 because its software went haywire.

The company's latest big campaign was in Spain, one of the last European countries to open its doors to alternative trading platforms. Over the last year BATS Chi-X, as it is known in Europe, has gone from about 4 percent of all trading in Spain, to almost 20 percent in some points in December. That is about where it is for the Continent as a whole, in the value of shares traded. The next biggest exchange operator in Europe is the London Stock Exchange, which also owns the main Italian exchange and has had a market share about a percentage point lower than BATS Chi-X in recent months.

In the United States, BATS and Direct Edge together hosted about 20 percent of all trading in the last month, compared with the New York Stock Exchange, which had a little less than 22 percent on its three exchanges.

BATS began in Spain, as in most other places, by bringing in the big global banks that wanted a cheaper and more seamless way to trade stocks across national boundaries. Citigroup, Bank of America and Credit Suisse are among the banks that have ownership stakes in the privately held BATS.

Now, though, the exchange is pressing hard to woo local brokers.

The chief executive of BATS's European operation, MarkHemsley, recently hosted an event at a private club in Madrid to which all the members of the Spanish exchange were invited. One of the first Spanish brokers to seek membership in BATS was Javier Domínguez, the managing partner at Auriga Global Investors. He said that he was attracted to the new exchange because of its reliable technology and low prices.

"They have huge muscle and they can go for it," Mr. Domínguez said.

But Mr. Domínguez is the rare local broker who is not skeptical. Jesús Sánchez-Quiñones, the managing director of the brokerage firm Renta 4, said that the main people rooting for BATS's success were Wall Street banks.

No one has fought the newcomer harder than the national exchange in Madrid, Bolsas y Mercados Españoles, and its chairman, Antonio Zoido Martínez. He said he was afraid to see Europe moving closer to the stock trading paradigm in America, where 13 different exchanges and dozens of dark pools allow banks to trade without revealing their hand.

Mr. Zoido acknowledges that BATS does offer cheaper trading, but he argues that BATS does not partake in the most basic social functions played by exchanges. BATS does not list new stocks, for instance, which is what allows companies to raise money from investors. BATS also tends to shut down when the main national exchanges are down, suggesting that BATS is relying on the national exchanges to determine the proper price of stocks.

"If it moves to another degree then it's dangerous for the society, and for the things that exchanges exist to do in society," Mr. Zoido said.

Mr. Hemsley fights back against those accusations, and says BATS limitations are primarily a result of barriers put up by the existing exchanges. The company has recently begun, for the first time, listing exchange-traded funds in London - a first step toward listing stocks. Mr. Hemsley said that his company's expansion in Europe had given traders choices and made it cheaper for almost anyone trading on the Continent.

The existing exchanges in Europe were "monopolies that were willing to work together by not going into each other's backyards," Mr. Hemsley said. "We put our feet in everyone's backyard."

Europe actually moved to electronic trading earlier than the United States, and has done away with almost all of its physical trading floors. But while the United States has allowed upstart trading venues to take business for over a decade, Europe only allowed this to happen with a rule change in 2007.

The BATS Chi-X that exists in Europe today is a combination of two earlier trading platforms - not originally exchanges - that came about in response to that 2007 change. Initially, it was Chi-X that experienced the fastest growth. Peter Randall, who helped found the trading platform, said that when he began, he told his staff, "I shamelessly want to copy the tricks that were used in America to make these things work."

That included offering small payments to brokers who sent certain types of orders to the exchange. Previously, brokers had paid to trade on the exchanges. The other thing Mr. Randall aimed to improve on was customer service.

Mr. Hemsley, a jovial former rugby player, was asked by Lehman Brothers, which was an early investor in BATS, to start the BATS European operation. Before BATS and Chi-X, a broker wanting to trade stocks across Europe had to join every single national exchange. As BATS and Chi-X expanded, they allowed brokers to trade in every country while connecting to only one trading platform. Both firms grew quickly, and merged in 2010.

Today, BATS's headquarters in Europe is in the middle of London's financial district, on the sixth floor of a modern building with a glass elevator. On the systems monitoring floor, employees chatter on the phone in French and Spanish. The actual trading for all of Europe takes place in a data center in a suburban town 20 miles from London.

The company's success has drawn in a new group of competitors. The London Stock Exchange has been increasing its investment in Turquoise, which allows traders to buy and sell stocks across the Continent. Another new pan-European trading exchange, Aquis, began operating in late November, led by a former chief executive of Chi-X.

But Mr. Randall said that catching up to BATS would not be easy.

"The regulators now view them as a critical part of market infrastructure - that's not an accolade that is given lightly," Mr. Randall said. "How fantastic, to come from nowhere in a very few number of years."

_Article written by Julia Werdigier, NYT