STEPPING UP TO THE PLATE.
BATS Trading has made a name for itself in the US by stealing the primary exchange’s thunder. It is hoping to do the same in Europe. Mark Hemsley talks to Best Execution about the trading platform’s strategy.
What is the background of BATS?
BATS was borne out of a high frequency trading environment and launched in January 2006 by 13 former employees of Tradebot Systems (a proprietary trading house). We now have 12% of the US market and are hoping to emulate our success in Europe. Obviously, there are differences between the two and although 90% to 95% of our platform is the same as the US, we have configured it to the clearing and settlement structures, local data systems and multi-currencies. We started out with 10 UK shares and are well into a phased rolled out of UK, French, Dutch, Belgium and German securities. At the moment, we have 22 employees and we expect that number to rise to 30 by the end of next year.
There has been a spate of MTF launches in the third quarter, what is your differentiating factor?
We have built a good reputation and trackrecord in the US and believe we can build on that in Europe. We also have a low cost base. We are based in Kansas City and can share the technology development costs between the two locations. Also, we deliver. Six months ago, we were across the street in a cafe and today we have a data and market centre, Financial Service Authority approval and are building market share. The other important factor is that we spend alot of time talking and working with the trading community to develop solutions. Ultimately, though, one of the most important factors is our trading technology. There is definitely a premium on speed.
Our platform enables people to trade 2,000 a second, which no human can achieve, and the BATS US platform has handled up to 187,000 trade messages a second over a sustained period of several hours. However, it is not just about raw speed in terms of execution. It is also about reliability and efficiency. It is also capable of handling high volumes, which has been particularly important in the last few months. The platform will not collapse under pressure and has been built to deal with unexpected events.
What has been the reception so far?
We are already ahead of schedule in the number of subscribers we thought we would have and our team here is busy signing new participants. They include proprietary trading houses, bulge-bracket brokers and smaller broker-dealers. We do not just want a corner of the market but a meaningful share and hope to have a 5% market share sooner rather than later, although our eventual target is significantly above that. The goal is to expand market share first and profitability will follow once we have achieved that.
How do you see the landscape unfolding?
I think Europe will emulate the US in terms of competition in the form of alternative trading platforms. We have already seen a number of high frequency players in the US setting up operations in Europe to take advantage of MiFID. We expect that to have a positive impact the MTFs. In general the MTFs have superior technology to the incumbent exchanges. They also offer one place to trade pan-European equities. I think the exchanges have been slow off the market in developing technology.
The next stage of development will be in the back office. Despite all the efforts in Europe, there is still no pan-European clearing house. Instead, we have two to four large central counterparties that can compete and interoperate. I think this is a better structure than in the US where there is one but that does not necessarily mean it is the most efficient.
Touching on the exchanges, what do you see as their future?
One of the problems is that many exchanges have shareholder bases that are looking for profits and return on capital. They are now trying to play catch up which is why we are seeing many announcing plans to launch their own MTFs. The main attraction of an MTF such as BATS, though, is cost. It is much cheaper to connect to our platform. We do not charge for membership, market data or connectivity whereas most exchanges charge for connectivity and offer proprietary networks.
The other advantage is people can come to one platform to trade pan-European equities instead of five or six. Part of the strain on exchanges is that they have a national view but they need to offer pan-European trading as well as rationalise their cost structures across boundaries.
Going forward, I think what we will see is that liquidity will beget liquidity and traders will move towards those centres that offer the best pricing, service and technology. The platforms that can achieve that will be the successful ones. Looking ahead, I think there probably will be small number of MTFS and exchanges that will survive.
What are your plans for 2009?
We will continue rolling out trading on the main European markets and signing up as many new participants as we can. Other plans include pricing innovation and implementing customer order functionality which is underdeveloped here in Europe. One of the main differences between the US and Europe is the lack of a consolidated tape which can make getting the best price difficult. I think it is useful to have a reference price so it is clear as to what you are getting.
The other feature we plan to introduce is sponsored access which enables participants to not only manage risk but also interact with BATS pools of liquidity.
Following on from that, can you explain the deal you were involved with Chi-X and Nasdaq OMX on symbology?
The three of us have formed an industry working group to develop a uniform symbology framework for trading European stocks. The goal is to have European trading participants be able to easily consolidate market data from any trading venue – either MTF or exchange – and to more effectively smart route orders. While it is just the three of us, participation will be open to all European execution venues.[Biography] Mark Hemsley is chief executive officer of BATS Trading Europe. Previously, he founded Belvedere Hill Ltd., a London-based corporate advisory business and was chief executive officer of Choreology, a venture- funded start-up which specialises in the development of leading-edge enterprise messaging software. From 2001-2004, Hemsley was managing director and chief information officer at LIFFE and from 1996 to 2000 was managing director global technology – chief investment officer and chief operating officer at Deutsche Bank. ©BestExecution 2008