Seven years ago, the company we now know as BATS Global Markets set out to revolutionize the equities-trading world with a handful of clients and a vision. On its first day of trading—Jan. 27, 2006—BATS traded 400 shares of stock. Two years later, it crossed the billion-share threshold for single-day trading.
How did it get there? The same way it has grown into the world’s third-largest stock exchange today: Incrementally. The I-word is one that Joe Ratterman liberally sprinkles throughout a conversation about the phenomenal growth of the Lenexa-based company, where he’s chief executive officer.
And incremental improvements,Ratterman says, have marked the firm’s response to a deeply disappointing March 23 attempt to go public. That effort ended just minutes after trading began for BATS’ own shares, on its own exchange.
“The first week was really, really hard for us all,” says the 47-year-old Ratterman. “In our seven-year history, I don’t recall any point in time where we felt like we didn’t succeed at something we set out to do. And so not getting the ball over the goal line was a personal hit for everybody.”
It was also an awakening, and a powerful inducement to be flawless in the execution of an even more ambitious project: setting up the electronic trading platform of the London-based exchange it had acquired last year. Ratterman’s team pulled that off without so much as an electronic hiccup, taking the new platform live last month on April 30.
What BATS Does
The average investor has little comprehension of what BATS is all about. It’s a stock exchange, yes, but there’s no trading floor with frantic shouts for orders to buy and sell. That open-outcry system, Ratterman notes, is a trading anachronism in any venue today, including the venerable New York Stock Exchange.
“You can go down to the Kansas City Board of Trade and see about 7 percent of their volume is still done by open outcry,” Ratterman says. “So 93 percent of their volume is
automated, as well. But that may be one of the last vestiges of open-outcry in the world.”
BATS is so new on the scene that many attribute its dynamic growth to some new-fangled form of high-speed trading, but the company itself is merely the most recent step in an evolutionary process that’s been going on for more than a decade: “The markets have already gone fully electronic,” Ratterman said, including the NYSE and NASDAQ. “I think the general mass institutional view of how the markets work is just now starting to catch up,” he said. “There’s this perception of a technology kind of overhaul going on within the U.S. securities industry, but in reality, that technology overhaul already happened. We’re in the incremental phases at this stage of the game of developing the electronic market.”
One of the things his team spends a lot of time doing, he said, is helping people understand that almost all activity in the markets today has characteristics that people are calling high-frequency trading. “Whether you’re a retail brokerage firm,
an agency or a big institutional or propriety trading firm, if you’re accessing markets today, you’re doing so through an automated mechanism,” Ratterman said. “There’s little human interaction in the markets today.”
What BATS has brought to the process is a mechanism for improving the efficiency of that marketplace, by offering incentives to traders that close the gap between the bid and ask price on a sale of securities. Rather than the technology itself, Ratterman said, “we spend most of our time worrying about how to create the fairest market possible and the best experience for a person accessing the markets.” In that sense, he said, you don’t use technology to race against NASDAQ or the NYSE; you use it to develop a smart matching engine that provides “an attractive opportunity for a market-maker to want to come and put up bigger size at a better price on your market.
Efficiency also comes from lower operating costs: BATS has 88 employees at its Lenexa headquarters, and 150 worldwide. Compare that to 1,800 at the London Stock Exchange and 3,500 at NYSE, and you can see the advantage BATS is able to offer clients with its fee structure.
Building Market Share
Those advantages, Ratterman said, help build market share. And BATS has done that, in spades. Of course, disruptive technologies and processes come at a price to those who haven’t embraced the change—or who previously profited from market inefficiencies. That doesn’t make you friends in this sector.
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