Exchange Operator Bats Considers IPO, International Expansion

Bats Global Markets, the stock trading platform that grew from two customers in 2006 to become the third-largest U.S. exchange operator, will expand to new products and consider an initial public offering, said Joe Ratterman, chief executive officer and president.

Bats, based in Kansas City, Missouri, accounts for 11 percent of U.S. stock trading and runs an American options exchange and equity market from London. The company, owned by an 11-firm group that includes Bank of America Corp. and Getco LLC., approached rival Chi-X Europe Ltd. about a takeover, two people familiar with the situation said on Aug. 24.

“Our aspirations are to be a meaningful part of every market that’s big enough for us to care about,” according to Ratterman, who said the company doesn’t comment on merger speculation. Ratterman said a partial IPO that doesn’t strip current investors of their ownership is possible within a couple years. “We want to continue to expand our global footprint.”

Bats is seeking new markets after its growth was driven by the explosion of automated trading in the U.S. during the last four years. The company began as an alternative to NYSE Euronext and Nasdaq OMX Group Inc., which acquired smaller competitors Archipelago Holdings Inc., INET ECN and Brut LLC between 2004 and 2006, before merging with European companies to become global businesses.

Tradebot Roots

Created by the founder of Tradebot Systems Inc., a computerized trading firm whose buy and sell orders now account for as much as 10 percent of U.S. equity volume on some days, Bats’s stock exchange turned profitable in 2008, Ratterman said. The platform for options is forecast to do the same in October, while making money in its European venue will take longer since the firm hired 30 people in London and must manage within a different regulatory system, he said.

Bats has 109 employees including 74 in its headquarters who eat lunch together every day at 11 a.m. local time.

Among the owners of Bats are companies that rely on the ability to update or cancel stock orders rapidly, including Tradebot and Chicago-based Getco, Wedbush Morgan Securities in Los Angeles and Lime Brokerage Holdings LLC in New York, whose customers include hedge funds and high-frequency traders.

“They were very clearly formed as a reaction to the consolidation of other trading venues,” said Justin Schack, director of market structure analysis at Rosenblatt Securities Inc. in New York. “They were first and foremost a user-backed utility, but they’ve changed since then. Now Bats operates more like a business that wants to grow and become more valuable.”

Shrinking Shares

As the portion of U.S. equities trading by the dominant exchanges declined, Bats determined in 2008 that no venue was likely to end up with a share of more than 20 percent, Ratterman said. It began Bats Europe, a trading venue that competes with the London Stock Exchange Group Plc and Chi-X, in October 2008 and a U.S. options market in February.

“They’ve been an aggressive exchange competitor with global ambitions,” said Richard Repetto, a principal at Sandler O’Neill & Partners LP in New York. “They’ve certainly already made inroads into Europe and they’ve expanded into other asset classes. They’ve got good technology and they’ve been pretty nimble.” Defensive actions by incumbent exchanges will present Bats with “stiff competition” as it expands, he added.

Canada, Brazil

Bats may introduce a market that competes for stock trading in Canada, Brazil, Australia, Japan, Singapore or China, Ratterman said. Products such as foreign exchange, fixed income, futures and a “whole host of other derivatives coming under regulatory scrutiny and that might come on exchanges” are also possible, he said. The company will decide which market to enter by the end of 2010 and will be ready to trade six months later, said Chris Isaacson, chief operating officer at Bats.

“We will enter one new growth market per year,” Ratterman said. “We want to find meaningful markets where we can drift in and plug into the infrastructure that exists -- and get our fair share of market share in an industry that’s big enough for us to enter. It must be open, big enough, the participants must want us and our technology must be able to make a difference.”

Direct Edge Holdings LLC, the fourth-largest U.S. exchange operator, followed Bats by selling stakes to brokers who used the platform to hold down trading costs. Direct Edge, initially owned by Knight Capital Group Inc., was spun off in 2007, with Knight, Chicago-based Citadel LLC and Goldman Sachs Group Inc. in New York taking the largest equity stakes.

The International Securities Exchange in New York, owned by Eurex in Frankfurt, now owns 31.5 percent of Direct Edge, which is also considering an IPO, Chief Executive Officer William O’Brien said in July. Direct Edge and Knight are in Jersey City, New Jersey.

13 Employees

Bats was founded in 2005 by Dave Cummings, owner of Tradebot Systems in Kansas City. Ratterman, who joined Tradebot in 2004 to focus on business development, previously oversaw 650 people as chief technology officer at Bridge Information Systems Inc. Two years after starting Bats with 13 Tradebot employees, Cummings returned to his old firm.

As Bats expands globally, the firm is seeking to boost its name recognition outside the trading industry. It created the Bats 1000 Index in July 2009, based on 10 industries of equal weight each comprising the 100 largest companies.

If ordinary investors can’t always distinguish between the New York Stock Exchange and the Dow Jones Industrial Average, “we’re not going to be able to correct that,” Ratterman said. “So if they’re confused about what’s an index versus an exchange, we decided we should have an index.”

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