Behind The Burst Of Bourses

How new markets are moving in on the Old Guard

While the New York Stock Exchange (NYX ) and NASDAQ (NDAQ ) chase after growth in London, Paris, and Mumbai, challenges are rising closer to home. BATS Trading Inc., a year-old Kansas City (Mo.) alternative market backed by Morgan Stanley (MS ), Lehman Brothers (LEH ), and others, has been stealing stock trading volume as it moves toward becoming a full-fledged exchange. "We very much want to be the third U.S. equities market," says CEO David Cummings. Someday, the self-styled "computer geek" says, he'd like to surpass NASDAQ.

Lofty goals, sure. But only 10 months ago, the NYSE felt threatened enough by an upstart exchange, Chicago's Archipelago, to buy it. And by March, regulatory changes will force more stock trades to be routed to alternative markets if better prices are available there. The changes are "opening up a genuine opportunity to compete," says Thomas M. Joyce, a former director of Archipelago and NASDAQ who runs Knight Capital Group (NITE ), parent of BATS rival Direct Edge.

BATS, formally known as Better Alternative Trading System, and Jersey City's Direct Edge do much of what exchanges do, matching buyers and sellers, but these electronic communications networks (ECNs) don't list stocks or police them. Together, they now handle over 400 million shares a day, more than 15% of NASDAQ's volume. BATS, with as many as 290 million shares a day, aims for 1 billion this year.

Many rivals are keen to take on the titans. The newest entrant, slated to make its debut by early March, will be the CBSX, a stock exchange being launched by Chicago Board Options Exchange Inc. "Our low-cost operation allows us to be incredibly competitive," says CBSX President David Harris. Slated to be the nation's ninth stock exchange, the CBSX is backed by NYSE "specialist" firms such as LaBranche & Co., whose trading floor staffers see Chicago as a refuge if their NYSE business shrinks with the growth of electronic trading.


Certainly, volumes are shifting. The Big Board's share in NYSE-listed stocks, for instance, slipped to 67.3% in December, nearly a percentage point less than November and down sharply from 76.5% a year earlier. NASDAQ picked up most of that. But reenergized exchanges in Boston, Chicago, New York, and Philadelphia, along with a new bourse started in September by the options-oriented International Securities Exchange Inc. in New York, are making some inroads, along with institutional trading outfits and the ECNs.

None is growing as fast as BATS, helped lately by a pricing special. Through January, BATS paid brokerage firms to send business, and Cummings is willing to lose $6 million or so this year to pick up market share. When pricing goes back to normal, he could lose volume, but he bets "the majority is likely to stick." No one else, he figures, will be cheaper or quicker. NASDAQ does not comment on competitors; the NYSE says it will keep crafting services to remain competitive.

BATS gets a boost from three little-known trading firms--Chicago's Getco, New York's Lime Group, and his own company, Tradebot Systems--that deliver up to 100 million shares a day, he says. In addition, he's getting business from Lehman, Morgan Stanley, Credit Suisse, (CSR ) and Wedbush Morgan Securities, all financial backers. Wall Street wants places to turn to if the giants hike fees or are too slow to innovate. "Competition is always good," says David A. Herron, CEO of the Chicago Stock Exchange.

Ultimately, there won't be room for everyone. "The U.S. doesn't need nine exchanges if they don't differentiate themselves," says Joseph S. Rizzello, who heads Chicago's National Stock Exchange. For his part, Cummings says three or four major markets will emerge. Skeptics bet he'll sell BATS one day, but he insists he'd like to be a thorn in the side of the NASDAQ and the NYSE for a long time to come.

By Joseph Weber

    Before it's here, it's on the Bloomberg Terminal.