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New ECN Throws Hat Into Consolidating Equity Market

With equity market consolidation occurring, BATS may help to fill a void in the ECN marketplace.

BATS Trading -- an affiliate of Tradbot Systems -- is stepping into the rapidly consolidating equity marketplace. BATS has announced it would be hosting its ECN servers in the SAVVIS data center, pending regulatory approval.

With consolidation occurring among the major equity markets, new entrants such as BATS Trading are starting to emerge to fill the void in the electronic communications network (ECN) marketplace.

BATS plans to launch a new electronic communications network (ECN) in early 2006, after it files with the Securities and Exchange Commission as an alternative trading system (ATS), according to Joe Ratterman, chief operating officer of BATS Trading, Inc., based in Kansas City, Mo.

This week BATS -- whose acronym stands for Better Automated Trading System -- announced that it would be hosting its servers in the SAVVIS data center in Weehawken, N.J., where Archipelago also hosts its servers. "One of the benefits to going with SAVVIS in their Weehawken data center is that Archipelago is connected," says Ratterman. "A subscriber that wants to route orders to Archipelago or to BATS can sit in the same data center with two ECNs -- that's the advantage," explains Ratterman. "It allows the customers to potentially talk to two primary ECNs in the United States through one internal data center, as opposed to connecting to five, six or seven data centers around the country," he adds. "And, the same data center can be used for routing orders to other equity market centers and for market-data receipt," he adds.

Under Regulation NMS, equity markets will need to scan other markets for the best price and route the orders if they can't be filled within their own order books. "We're going to outbound to other trading destinations and if those trading destinations are supported by SAVVIS' infrastructure, we'll route through that infrastructure, and if not, we'll do whatever it takes to be connected," says the COO.

No stranger to automated trading, BATS is a spin-off from Tradebot Systems, an automated provider of short-term liquidity to exchanges and ECNs. Trading for its own account, Tradebot is a key liquidity provider in U.S. equity markets, putting up significant daily volume, says Ratterman, noting "Computers make nearly all of the trading decisions."

Because of that background, Ratterman says, "We understand the different kinds of players that are transacting today and BATS feels we can build an ECN that caters to the specific needs of different market participants." Ratterman says BATS will differentiate itself with unique order types, functionality and order handling.

To jumpstart the ECN, Tradebot will become a subscriber and provide liquidity. "We hope to incent the other liquidity providers to put up liquidity as well," says Ratterman, who notes the firm already has a top 30 list of potential subscribers. Initially, the subscribers will have to be broker-dealers and institutions will need to go through a sponsoring broker-dealer.

According to Matt Fox, vice president and manager of the financial-services division at SAVVIS, its Weehawken, N.J. data center is well positioned for low-latency market data and order routing. "It's better than having a data center in California," says Fox, adding that the Weehawken data center has good proximity to sources of data coming out of the New York Stock Exchange and Nasdaq. "They also have access to the financial-services firms connected to SAVVIS on our extranet," says Fox. "Whether the firms are using our network for FIX connectivity or accessing our trading providers, those firms will be able to subscribe to the BATS service over our network," Fox adds.

To raise its profile in the financial markets, and increase its value to customers, SAVVIS wants to add other ATSs to its extranet, says Fox.

In addition to adding BATS, SAVVIS also announced that Track Data Corp. will use the SAVVIS financial extranet for quick and easy access to Track ECN. According to the release, Track ECN has the best published rates -- the highest rebate and the lowest access fees in the industry. (Currently, Track ECN charges clients $2.50 per thousand shares for removing liquidity directly from its book, while removing liquidity indirectly costs $3.00 per thousand shares or more).

With the number of ECNs plummeting from a dozen six years ago down to a few today, and the equity markets approaching a duopoly, "I think Track Data and BATS realized there was a void in the industry for these services," says Fox. But while Track ECN has its own data center, Fox notes, BATS is hosting its entire server infrastructure in the SAVVIS data center.

Right now, BATS is developing the ECN -- which consists of proprietary software that takes in buy and sell orders and knows how to match order, print and route orders. Ratterman says the ECN will be based on a distributed architecture with several matching engine components running in parallel. The core matching technology will be replicated in a number of matching engines that will work together to handle the volume. A lot of progress has been made, he says, and he anticipates having the core-matching technology ready for testing in the next 60 days -- in the October time frame. "We're definitely ramping up," says Ratterman. Last month, BATS announced a clearing arrangement with Wedbush Morgan. It's already filed to become a registered broker-dealer with the NASD, moving a step closer to filing with the SEC under Regulation ATS. Ivy is Editor-at-Large for Advanced Trading and Wall Street & Technology. Ivy is responsible for writing in-depth feature articles, daily blogs and news articles with a focus on automated trading in the capital markets. As an industry expert, Ivy has reported on a myriad ... View Full Bio

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