Two major electronic communications networks (ECNs or so-called dark pools) moved closer to the light of full exchange status when BATS Trading received SEC approval for exchange status and Direct Edge announced a partnership with the International Securities Exchange (ISE) that would advance its transition to exchange status. BATS, which filed for exchange status in November 2007, expects to launch its exchange in late October.
Direct Edge is in an earlier stage in the process, expecting to formally file for exchange status with the SEC in late September or early October. Under its agreement with ISE, Direct Edge will gain direct access to the National Market System and the ISE Stock Exchange will become a wholly owned subsidiary of Direct Edge.
To begin trading on the BATS exchange, current BATS subscribers must submit membership exchange documents. “The people who will really benefit are the firms that are not directly connected to BATS, [like] those that come to us through an order management system,” says BATS spokesperson Randy Williams. BATS currently quotes through the National Stock Exchange and ISE, but when it becomes an exchange it will take its quotes to the market directly, allowing users to see quotes in real time and removing the small time discrepancy that currently exists. “More brokers will have better access to the BATS system. It will allow us to deepen our pool of liquidity and we expect volume to grow,” Williams says. BATS now has 10.2% matched market share and expects to have 15% by the end of the year.
“Being an exchange, BATS quotes will be protected and the process of interacting with it should be more streamlined,” says Larry Tabb, CEO of Tabb Group, adding that the greater accessibility of BATS quotes will be a major benefit to traders and the thought of BATS becoming an exchange “should send shivers up the spines of existing equity exchange executives.” He says BATS is aggressive, has low overhead and has a more streamlined infrastructure. “We will most certainly see an increase in BATS market share in at least the short run,” Tabb adds.
Its partnership with ISE accelerates Direct Edge’s technology and improves capacity and reliability and allows it to compete more effectively over the long term with the larger exchanges, says Direct Edge CEO William O’Brien.
“Both [BATS and Direct Edge] are demonstrating the ability to compete very effectively. I see them competing on speed and price” with NYSE and Nasdaq, says David Harris, CEO of CBSX, the stock exchange of CBOE.
Ten percent of the volume on both BATS and Direct Edge is comprised of dark executions. “Anyone who claims that the displayed market is going away is way off base. Ninety percent of our volume is in displayed market right now and we expect that trend to continue,” Williams says.
On whether or not the trend of ECNs gaining exchange status will continue, Harris says, “There are not that many large ECNs that remain once BATS and Direct Edge have decided to [take] this path. Other businesses may say that an exchange registration is nice for us to have or fits into our business model, so that’s a possibility but there’s no one that’s obvious to me that would pursue that route.”
