Bats-Direct Edge merger puts broker-owned venues back on top

Customer Aligned

“We see ourselves as aligned with our customers and working for their best interests,” Randy Williams, a Bats spokesman, said in phone interview. “We’re not sure that our legacy competitors look at things in the same way.”

Eric Ryan, NYSE spokesman, declined to comment, as did Nasdaq spokesman Rob Madden.

NYSE has previously described the competitive threat from its former members.

“Many of our key customers are prioritizing their internalization and ATS businesses ahead of their exchange-based market-making business,” the company wrote in its final quarterly report before the ICE acquisition in November, referring to the practice of trading firms matching buyers and sellers internally or trading on alternative venues other than exchanges. Banks and brokers also trade directly with each other, another way they avoid the exchanges, NYSE said.

‘Only Counterweight’

“The only counterweight to this concentration of orders is the clients themselves, the investment managers, and where they ultimately want to direct their orders,” IEX’s Katsuyama said. “After all, it’s their right to choose.”

Joe Ratterman will remain chief executive officer of Bats Global Markets, while Direct Edge CEO William O’Brien will be president.

Lenexa, Kansas-based Bats started trading in 2006 with the aim of matching the incumbent public markets on speed and beating them on prices. It was founded by high-frequency trader Dave Cummings of Tradebot Systems Inc. Direct Edge, based in Jersey City, New Jersey, was wholly owned by Knight Capital Group before it was spun off in 2007. Knight last year merged with high-frequency trading firm Getco LLC, which held a stake in Bats, to form KCG.

Rule changes also affected the business models. Regulation NMS, which came into effect in 2007, said orders had to be sent to whichever platform offered the best price. Boosted by Reg NMS, broker-run alternative venues known as dark pools have grown and as much as 40% of daily trading now takes place away from public markets.

Dark Pools

Dark pools made up about 14% of volume in December, according to Rosenblatt, whose data show the largest of the venues are owned by the same firms who own the new Bats, such as Goldman, Morgan Stanley and KCG. Credit Suisse’s dark pool was also among the biggest venues, though the firm stopped reporting its data to Rosenblatt last year.

The brokerage industry is pressing for more changes. The Securities Industry and Financial Markets Association last year urged the government to strip exchanges of their status as self- regulatory organizations, which puts them in the position of overseeing some of the same firms that also run alternative trading platforms.

“Conflicts of interest in this model abound and only worsen as they are left unresolved,” Theodore R. Lazo, associate general counsel at Sifma, wrote in a letter last year to the SEC.

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