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2007-06-06 10:52:40
Techie Upstart Taking on Stock Markets
March 8, 2007 7:17 PM ET
KANSAS CITY, Mo. (AP) - As the markets dropped sharply last week, sending
volume soaring and backing up trades handled by the New York Stock Exchange, at
least one stock market player was resting easy.
Bats Trading, an upstart electronic trading system hundreds of miles away in
Kansas City, said it handled the volatility with none of the glitches that
others did.
Bats has quickly become the third-largest stock trader by volume, trailing only
the NYSE and Nasdaq Stock Market, thanks to its technology and aggressive
pricing. And with new Securities and Exchange Commission regulations designed
to ensure that trades are routed to the market that offers the best price, Bats
is poised to pull more business away from the NYSE and Nasdaq.
Since founder Dave Cummings set out last year to challenge the two exchanges,
volume on his electronic trading platform regularly tops 300 million shares per
day, or about 15 percent of what is traded on Nasdaq. Cummings predicts that
total will reach one billion shares a day by the end of the year.
Recently, the company began the paperwork to become a legitimate stock
exchange, a process that could take several years but would level the
regulatory playing field with the NYSE and Nasdaq.
"We've just been able to execute our plan," Cummings said. "We're very good at
being nimble entrepreneurs."
Cummings is a 37-year-old self-styled "computer geek," who was born just
outside of Kansas City. He graduated early from Purdue University with degrees
in computer and electrical engineering, then went to work for medical software
company Cerner Corp.
In 1995 he ventured into the pits at the Kansas City Board of Trade, where he
designed a computer system that would automatically do the work of a pit
trader, first trading wheat futures and later stocks.
That computer system evolved into Tradebot Systems Inc., which like Bats is
headquartered in Kansas City, Mo., but houses its computer systems in a suburb
of New York City, close to Wall Street.
Tradebot took advantage of electronic communications networks like Archipelago,
INET and Brut to quickly execute trades. Unlike traditional exchanges, which
act as intermediaries to connect buyers and sellers, ECNs automatically match
buy and sell orders at specified prices.
But over the past couple of years, the NYSE and Nasdaq aggressively bought out
the ECNs that offered the greatest competition. Cummings opened his own ECN --
Better Alternative Trading System, or Bats Trading -- just over a year ago,
with Tradebot one of its first customers.
"I like to move very quickly," Cummings said. "I'm known to be very impatient.
I lay out a goal, I break down that goal into steps that can be implemented,
and start moving. Pretty soon you're across the room and you didn't realize
it."
Cummings hopes to capitalize on the trend toward electronic trading that has
already led the NYSE to begin phasing out about 20 percent of its floor space.
The NYSE and Nasdaq aren't the only stock exchanges facing new competition,
though. Seven investment banks are banding together to create a secondary
trading platform in Europe called Project Turquoise, which could eventually
rival the London Stock Exchange.
But Larry Tabb of The TABB Group, a New York-based consulting firm, said two
things have allowed Bats to thrive where others have not.
First, Cummings made arrangements with several major electronic marketing firms
like Getco LLC that generate millions of trades without people being involved.
That created the volume that attracts other brokers, who can then buy and sell
shares more efficiently.
"Once you get a certain amount of volume, others want to be there," Tabb said.
"You prime the pump, so to speak."
Second, the company has only a couple dozen people in modest offices. Cummings
has spent less than $20 million so far, and as a private company, does not have
to answer to public shareholders. That has allowed him to offer a pricing
structure that includes low base trading fees that are supplemented with large
rebates for volume traders.
"If you went to the New York Stock Exchange, they have this imposing structure
on Broad and Wall. You go to Bats, they're on the second floor of a Kansas City
strip mall," Tabb said. "They have a very different cost structure."
While Bats' final price of two cents for every 100 shares traded usually
undercuts the NYSE and Nasdaq, a special in January offered a rebate larger
than the base price, essentially paying broker-dealers to use the Bats system.
The company lost about $6 million, but attracted more trading to the platform.
Even after prices returned to normal, volume has hovered around 300 million
shares per day. A single-day record of 399.9 million shares moved on Feb. 27,
the day the Dow Jones industrial average plunged 546 points before ending the
day down 416, the largest one-day decline since markets reopened after the
Sept. 11 attacks.
"From a strict client perspective, Dave is essentially a very fast,
technologically efficient system," said Jamie Selway of New York-based White
Cap Trading LLC, which uses the Bats system. "It's a very stripped down,
efficient electronic trading vehicle. And the price is exactly right."
Several broker-dealers have bought into the company, including Lehman Brothers
Holdings Inc. and Credit Suisse Group, who trade millions of shares each day in
Nasdaq-listed volume and NYSE Group-listed shares.
On Wednesday, Merrill Lynch & Co. added its name to the list, purchasing a
minority stake for an undisclosed sum.
"They're going to be one of the winners and the brokers are realigning to place
bets on the winner," Tabb said, "and on the crazy guy who's willing to take on
Nasdaq, and eventually the New York as well."
Rich Adamonis, a spokesman for the NYSE, said the company does not typically
comment on competitors. But he said Bats has been surprisingly successful, and
that the NYSE "welcomes competition in the market place."
Nasdaq spokeswoman Bethany Sherman also declined to address Bats specifically,
but pointed out a recent earnings call in which chief executive Bob Greifeld
was asked to address the upstart competitor.
"We respect them," said Greifeld, adding that he does not believe the Bats
pricing structure will allow for long-term growth. "The fact is that it's not
in the interest of anybody in the space to have exchanges, ECNs, that are not
sustainable."
Cummings insists that he is not out only to make a profit, and that he
genuinely cares about competition in the market. But he is willing to fight for
his share, even if it means pointed attacks at Nasdaq in an e-mail
correspondence with customers and street-wide observers.
Recently, Cummings said Nasdaq's failed attempt to buy the London Stock
Exchange would be the "biggest financial blunder of 2007." Another e-mail
claimed "Nasdaq seems to be getting very close to a total schizophrenic
meltdown," and that "they consistently do everything possible to stomp Bats out
of existence. (But) everything they do seems to backfire."
The back-and-forth has caused many market observers to cringe.
"People are pretty amazed at how much he's been able to accomplish," said Sang
Lee, managing partner of Aite Group, a Boston-based financial services research
firm. "They may not say it publicly, but I would bet they are concerned. I
think they should be concerned."
Said Selway: "He's a positive force for competition, but I think it has gotten
pretty personal."
Cummings chuckles at the notion that his upstart company is ruffling the
feathers of Nasdaq and the NYSE. He says he has a 30-year plan, and if he's
roused up this much controversy in a little more than year, who knows what
comes next?
"I got into this market to make $100,000 a year and feed my family and to allow
my wife to stay home with the kids," Cummings said. "I never in my wildest
dreams thought we'd be here at the center of the U.S. equities market."
___
On the Net:
Bats Trading: http://www.Batstrading.com
New York Stock Exchange: http://www.nyse.com
Nasdaq: http://www.nasdaq.com
? 2007 The Associated Press. All rights reserved. This material may not be
published, broadcast, rewritten or redistributed.