Low Latency News

From Wall Street Journal Online:

Alternative trading system Bats Europe is planning to challenge London Stock Exchange Group with a new pricing plan next month for U.K. stocks, which it hopes will attract orders from the LSE.

Bats Europe said Tuesday it will invert its U.K. prices next month, meaning the firm will pay clients more for adding liquidity than it charges them to remove liquidity. The pricing tactic has proved successful for the firm in Europe and for its parent Bats Global Markets Inc. in the U.S.

Starting Sept. 1, Bats will pay a rebate of 0.004 percentage point on U.K. trades for adding liquidity and will charge 0.002 percentage point to remove. It won’t charge any fee for customers trading more than an average of £50 million ($82.8 million) a day.

This means Bats Europe would give clients £4 for every £100,000 of business they post on the system, while it will charge a smaller customer £2 — or a larger trading firm nothing — when it takes the other side of the trade.

The move coincides with the LSE’s plan to dump its rebate and fee model — known as “maker taker” — on Sept. 1 and start charging fees on both sides of the transaction.

“Many of our customers are disaffected with the LSE decision to drop the maker taker and we see this as an opportunity to dramatically increase our U.K. market share,” said Paul O’Donnell, chief operating officer of Bats Europe. “We are hoping to boost our share to as much as 10% by the end of September.”

Bats Europe was trading about 4.4% of FTSE 100 equities this week compared with the LSE’s 66%, according to Bats data.

A spokesman for the LSE wasn’t available for comment.

The Bats pricing tactic has helped boost the firm’s trading activity in Europe, where it introduced a similar policy for French, Dutch and Belgian stocks in June, and in the U.S. where inversions in January and September 2007 established the platform in its home market.

The Bats move came just a day after rival exchange Turquoise, which is owned by many of the same investment banks, said it is putting itself up for sale. Turquoise has sent sales prospectuses to 18 possible buyers, including the LSE and Bats Europe.

Turquoise is part of an effort by the banks to gain more control over the cost of buying and selling stocks in Europe’s financial markets. But the exchange has had a hard time making significant inroads since its launch last autumn.

Write to Luke Jeffs at luke.jeffs@dowjones.net

Corrections & Amplifications
Under a new pricing plan, Bats Europe would give traders £4 for every £100,000 of business they send into the exchange’s system. A previous version of this article incorrectly said the rebate would be £4 for every £1,000.

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The Securities and Exchange Commission may crack down on a controversial practice that has caught on at various U.S. stock market centers, including Nasdaq, Bats Exchange and Direct Edge, that gives some traders privileged access to key market information.

In a letter fired off Friday, Sen. Charles Schumer (D-N.Y.) asked that the SEC ban so-called flash order types, which route stock pricing information for a brief period of time away from the displayed market centers, where all investors can see current orders and prices, and shows it to a limited group of member traders who can then decide whether to fill an order before it is routed out to another market.

The issue has been one of increasing controversy on Wall Street. Flash quotes fly in the face of four-year old rules that were supposed to level the playing field for all investors and make pricing information more accessible. Yet until now the SEC has allowed the three market centers to proceed.

Regulation National Market System required that orders be filled at the best price at any given time regardless of where that price was located. So if Nasdaq did not display the best price for a given stock as the order came in but Bats did, Nasdaq would have to route the order to Bats.

The flash quote programs hold up that process by displaying orders to members for as much as 500 milliseconds–an eternity in electronic trading–before routing out. Some say that gives traders with access to the flash quotes an advantage in that they can fill an order for a lower cost than it may be once it gets routed back out to another market.

Given the explosion in market volumes in the last year, and the fractionalization of the markets caused by Regulation NMS, the major stock trading venues have an incentive to try to fill orders in-house without routing out to rival centers. Direct Edge, an electronic communications network backed by Goldman Sachs ( GS – news – people ), Citadel and Knight Trading, was the first to offer such an order type to its members and recently has used it to great success in siphoning market volume away from NYSE, Bats and Nasdaq.

From Wall Street and Technology:

A year after becoming an equities exchange, BATS plans to grab a
chunk of the options market through aggressive pricing that appeals to
some of the same automated liquidity-providing firms that helped make
it the third-largest exchange operator in U.S. equities.

“Compared
to our competitors in this space, we’re lean, based on our direct
monthly expenses and capital outlay to get into options, so we’re
operating on a different scale than other exchanges,” said Joe
Ratterman, CEO of BATS Exchange. “Because of that, we can be
aggressively priced.”

BATS Options will have maker-taker
pricing in a price-time market model. The exchange hasn’t yet announced
its pricing, but will target all options classes, and not just those
quoted in penny increments, Ratterman said. He does not think the
exchange will offer different pricing for penny-quoted and
non-penny-quoted options, but noted that the final decision hasn’t yet
been made. In equities BATS has sometimes used inverted maker-taker
pricing to attract volume.

“If history is any guide, they’re
very aggressive with their pricing metrics, and will enter the options
space with a pricing structure that will undercut the competition and
will attract interest and competition from trading entities,” said Andy
Nybo, a principal at research firm TABB Group.

BATS’s
ambitions for options are aggressive. “We wouldn’t be going into this
market if there wasn’t a big opportunity for BATS to come in, make
improvements and gain market share,” Ratterman said. “U.S. equities was
one of the most competitive markets in the world and we managed to do
very well when we broke into that space. There’s nothing to keep us
from being successful in options.”

Ratterman expects BATS’s
eventual options market share to equal its share in equities. In June,
BATS accounted for 10.7 percent of equities volume. BATS, formerly an
ECN, opened for trading in January 2006 and became an exchange in
August 2008.

BATS intends to build its options market by
appealing to a range of investors, including institutions, retail
brokers and market-making firms. “We’ll attract as much diversity [of
flow] as possible,” Ratterman said. “We have a fair and open model in
the equities world and will have that in options.”

But the
exchange’s strong suit is its appeal to automated market makers. “The
performance metrics of our system have traditionally appealed to
automated market-making firms because of the low-risk characteristics
of their trading on our markets, and the consistency and performance of
our system,” Ratterman said. “It’s likely we’ll have as much influence
on the options side.”

TABB’s Nybo notes that BATS’s reputation
for having a strong technology platform and low-latency infrastructure
will boost its prospects in options. “They are looking to attract
quantitative trading firms using low-latency, high-frequency strategies
and those that arbitrage fleeting price discrepancies,” he said.

BATS
will file the rule set for its new market “shortly,” according to
Ratterman. He said the launch of BATS Options is targeted for January
or February of next year, subject to approval by the Securities and
Exchange Commission.

BATS Options will join a growing
marketplace populated by seven options exchanges. Last month, 296
million equity options contracts changed hands, up 5.6 percent over the
previous June’s volume. The industry traded a record 3.3 billion equity
options contracts in 2008, an increase of 26.7 percent over 2007’s
record volume. This year is on pace to exceed last year’s volume.

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LONDON & KANSAS CITY, Mo.–(BUSINESS WIRE)–BATS Europe, an innovative and technology-leading European Multilateral Trading Facility (MTF), plans to continue inverted pricing for the NYSE Euronext indices — CAC 40, AEX and BEL20 — and select exchange traded funds (ETFs) through July, and will also reduce the liquidity removal fee for those securities to 0.25 bps as of the 1^st of July.

In addition, following the successful launch of three pilot ETFs, BATS Europe is further expanding its stock universe by adding 20 actively traded ETFs. All ETF instruments will be included in the inverted pricing schedule for July.

In June, BATS Europe has set one-day market share records in the CAC 40 (7.55%), AEX (5.37%) and BEL20 (4.60%) as well as in major indices in London (6.40% in the FTSE 100) and Germany (5.65% in the DAX).

“We thank our participants for their tremendous response to our inverted pricing in June and are pleased to extend the special into July whilst offering further incentive for participants to trade their CAC 40, AEX, BEL20 and ETF order flow on our efficient and reliable trading platform,” said Mark Hemsley, CEO of BATS Europe.

BATS Europe recently recorded one-day notional value and overall market share highs in June of €1.24 billion traded with a 4.02% share of the European market.

BATS Exchange, BATS Europe’s sister company in the U.S. and the world’s third-largest securities exchange operator in terms of notional value traded, ran similar inverted pricing schedules in January 2007 and September 2007 and gained significant market share on both occasions, growth which continued after BATS Exchange returned to its normal pricing plan.

For more information, participants can contact the BATS Europe Trade Desk (+44-207-012-8901, TradeDeskEurope@batstrading.com) or their account manager.

About BATS

BATS Global Markets (BATS) is an innovative global financial markets technology company headquartered in the Kansas City, Mo., area with additional offices in New York and London. The BATS platform was launched in January 2006 and, operating as BATS Exchange, Inc. is one of the fastest growing, top tier equity markets in the United States. BATS serves the European market through its London based, FSA-authorised subsidiary, BATS Europe, which operates a Multilateral Trading Facility for European securities. The BATS platform is internally developed by a dedicated core team of market and technology professionals, catering to the needs of the broker-dealer and trading community. BATS … Making Markets Better.

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