What Is BATS?

Is It Really Better than the NYSE or NASDAQ?

••• Owner: By: Rainier Ehrhardt

BATS Global Markets was a stock exchange operator located in Lenexa, Kansas. On March 1, 2017, CBOE Holdings Inc. acquired BATS for $3.4 billion. It uses the BATS advanced order matching system to lower costs on the Chicago Board Options Exchange. The BATS team will continue to run its current exchanges.

The merger achieves economies of scale in operational costs.  That could lead to lower costs for investors. It also makes CBOE a stronger competitor against the New York Stock Exchange and the NASDAQ.

The former BATS platform had four U.S. stock exchanges: BZX, BYX, EDGA, and EDGX. It also operated BATS Options and BATS Chi-X Europe, the biggest pan-European stock market. These have been folded into the CBOE options exchanges: Cboe BZX, Cboe EDGX, Cboe Options, and Cboe C2 Options.

Options are derivative contracts that gives owners the right to buy or sell securities at an agreed-upon price within a certain time period. Call options give you the right to buy a security and put options give you the right to sell them.

The BATS team in Lenexa is responsible for integrating BATS with CBOE. The CBOE Futures Exchange has migrated onto the BATS network. It is integrating the C2 options exchange and the C1 options exchange in 2019. The goal is to make the new CBOE a leading player in the global options and equities markets. It already controls 42% of U.S. options, 21% of European equities, and 13% of the global foreign exchange market. 

CBOE is integrating the BATS system instead of upgrading its own system. That would have cost $50 million over three years. CBOE will also be able to take advantage of BATS' European network.

The BATS platform is an all-electronic alternative trading service. Its goal is to provide better technology, with lower costs, while maintaining better customer service. It was created to avoid the kind of technology problems plaguing the major exchanges.

Ironically, BATS suffered a flash crash itself when it listed its own initial public offering on its own exchange. On March 23, 2012, BATS was forced to withdraw its IPO when the stock price plummeted from $15 a share to just pennies. The crash pushed Apple's stock down 9%, forcing a temporary halt in its trading. It prompted the Securities and Exchange Commission to investigate high-frequency trading exchanges, including BATS. (Source: Bloomberg, The Epic Fail of the Worst IPO Ever, March 23, 2012)

BATS History

BATS was founded in June 2005. At that time, BATS was an acronym for "Better Alternative Trading System." It received SEC approval to become an actual stock exchange, BATS BZX, in October 2008. It launched a BATS exchange in London that same year and opened a second U.S. exchange, BATS BYX, two years later. The two U.S. exchanges have different pricing policies. Together, they account for 13% of all U.S. stock trading. 

In 2011, BATS acquired Chi-X Europe Limited, the largest cross-border trading center in Europe. Unlike the Deutsch Bourse or the London Stock Exchange, it allowed trading across 15 major European markets with just one platform and rule book. 

In 2013, BATS announced it would merge with Direct Edge to create the second largest stock exchange, trading fewer shares than the NYSE Euronext but more than the NASDAQ. 

In January 2015, BATS agreed to pay a record $14 million penalty levied by the SEC. Its two recent Direct Edge Holdings acquisitions hadn't gotten SEC approval for its rules governing how orders were placed. Instead, they favored some of their clients by giving them inside knowledge about how the rules operated. The BATS penalty was higher than the $10 million paid by Nasdaq to settle its bungled Facebook IPO. (Source: John McCrank, "BATS Exchange Group to Pay Record $14 Million U.S. SEC Fine," Reuters, January 12, 2015)

In February 2015, it replaced founder Joseph Ratterman as CEO with Chris Concannon, a former NASDAQ and Virtu Financial executive. He is expected to restart BATS IPO process, only this time on one of its competitors, NASDAQ or NYSE. (Source: Bradley Hope and Chelsey Dulaney, "BATS Global Markets Names Chris Concannon as CEO," Wall Street Journal, February 24, 2015.)

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