BATS: Building Technology, Creating Markets
April 19, 2010
Its founders built the company's first all-electronic exchange just five years ago, proclaiming they could engineer a better way to handle equities transactions from the middle of America faster than was done on Wall Street. They declared themselves BATS.
As in the Better Alternative Trading System they were introducing.
And it keeps showing its ambitions to take what it believes are the fastest and most consistently reliable systems for executing transactions electronically into new types of trading. In February, it entered the options market, with its own exchange. Some time this summer, it intends to open a second equities exchange, which it regards largely as an experiment to find even better alternatives in how trades can get conducted at high speed and low cost.
While based in Lenexa, Kan., its matching engines are hosted in Weehawken, N.J., next to the Lincoln Tunnel that leads into Manhattan-and just a seven-mile drive to Wall Street. A data center operated there by Savvis hosts not just BATS, but its options exchange and, by end of summer, the second U.S. equities exchange. In London, BATS Europe sits inside the Savvis Docklands data center.
So confident of its efficiency, BATS publishes its speed statistics and publicly challenges its rivals, like the New York Stock Exchange, to publish theirs. The NYSE, which operates its Arca electronic competitor out of a different data center in Weehawken, so far has declined. That could change when the NYSE moves its operations to a state-of-the-art data center and hosting facility that it is building in Mahwah, N.J.
In the meantime, BATS notes that the average time it takes to execute an order on its matching engine is 250 microseconds, or, millionths of a second. Eighty percent of those orders are acknowledged in the same amount of time. Only one-tenth of one percent take longer than 1.3 milliseconds, or thousandths of a second, to acknowledge.
BATS has not just been trying to set speed records. It's hacked away at spreads, meaning its broker and trader customers can move ever-more shares at lower cost as its systems get more efficient and the impact is what founder and chief executive Joe Ratterman calls ''price compression" that ripples throughout capital markets.
"There was room in the market for price compression,'' Ratterman says. "We knew that we would be successful if we could start that pressure and continue with it."
Here is how Ratterman describes BATS' efforts to innovate in how securities exchanges can and should operate.
Q. When you conceptually tried to figure out what a better alternative trading system would be, what in your mind were the three most important elements that had to get converted into the platform you brought out?
