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Electronic Stock Exchanges

Written By Brian Hicks

Posted November 25, 2008

You may not realize it, but with every stock trade, microseconds matter.

When you enter a stock trade in your brokerage account online or put a call in to a trusted broker, there’s a behind-the-scenes shuffle of lightning-speed transactions on electronic stock exchanges.

Despite what you hear from the bully pulpit, information and efficiency are really the keys to market health. The old NYSE model of barking orders and pieces of paper flying all over the place is on the way out. Automated markets and technology have been with us for decades, and their progress will dictate how well the financial system is able to predict and overcome adversity.

Let’s face it… We won’t see the real regulatory hangover from sub-prime for a few more months – at least. Many expect a legislative return to post-Depression limits on banking activities, where Greenspan-era loosening kicks hard into reverse. It looks like we’ll certainly bear witness to a deluge of new government spending to kickstart the sluggish economy, and a few hundred billion more bucks in bailouts.

But the real problem with sub-prime was all of the incomplete information. Home buyers signed blank sheets of paper in some cases.

Mortgage divisions of major banks like Citi kept hush-hush about their nose-diving operations so as not to hurt the company’s earnings estimates. And in the end, we all got burned when the players finally announced billions in losses that had accumulated. It was too late.

Far from Wall Street and Washington, BATS Exchange is taking market share from NASDAQ and NYSE by pushing technology forward and helping mitigate risk—two major markers of stock market evolution.

BATS Exchange

From its base in suburban Kansas City, BATS has become the world’s #3 market center. BATS saw over $1 trillion in notional value pass through its processing centers in October alone. The company is gaining steadily on its major domestic competitors—NASDAQ and the New York Stock Exchange’s Arca platform—by doing what any good business does: BATS gains customers by keeping its comparative advantage.

Most importantly, BATS can accommodate higher trading capacity and move exponentially more quickly than the competition. That can lead to millions of dollars in savings.

Forget 20-minute quote delays… When I spoke with BATS CEO Joe Ratterman at the company’s headquarters just before Thanksgiving, he explained how decimal points define leadership in secondary electronic trading.

"The measurement bar is millionths of a second," Ratterman says.  That value is appreciated by the large institutions and broker-dealers that make up BATS’s clientele. As the BATS brand and its reputation for efficiency grows, so does its market share.

From 12-14% market share today, the CEO expects more of an even split among the exchanges sometime next year, leaving BATS, NYSE Arca, and NASDAQ each with about a 25% chunk.

But here’s the deal: BATS’s competitors in New York both act like they are the only game around. Ratterman isn’t having it. "Major markets are still acting as if data comes from one source," he says. "In a fragmented world, the data that comes from any one source has lost most of its value."

And nobody should settle for incomplete information when it comes to equities, especially in today’s volatile environment.

What’s worse, NASDAQ and Arca charge for the pieces of pricing info they give, and their pricing systems are pages long. BATS has a simple, one-page structure of charges, which saves time and money in processing.

You won’t see this in your retail share swaps, but educated investors today need to have an idea of how stock market sausage is really made… and BATS is there, streamlining the back end for everyone’s benefit.

It’s not just about the United States, either. You now have access to a nearly seamless 24-hour trading day around the world, with more and more brokers offering trades in London, Tokyo, Hong Kong and Frankfurt.

So BATS recently launched its London-based European operations. Expect them to make big inroads overseas, and quickly.

By plugging data holes and challenging established exchanges to move more quickly and openly, BATS is helping make markets better around the world.


Sam Hopkins

P.S. – My colleague Ian Cooper sits right next to me here in the bullpen, and he is the king of flashing screens. He’s on top of every trade in the fast-paced market, playing the upside and downside to his readers’ advantage while he crunches the latest numbers. He may not be reacting ever microsecond like the BATS system, but Ian’s Options Trading Pit track record and daily trades continuously keep you in the money. To learn how to pick up the pace of your profits, check out Options Trading Pit today.