* BATS’ core trading business solid despite IPO stumble
* Canceled IPO hurts nascent listing business
* Future growth and expansion uncertain
* Regulators don’t see link to high-speed trading concerns
By Tim McLaughlin and Olivia Oran
BOSTON/NEW YORK, March 26 (Reuters) – Orders flowed normally
through BATS Global Markets on Monday, sending a sigh of relief
that the core trading business of the nation’s third-largest
stock exchange remains on track despite a high-profile trading
snarl on Friday.
Questions remained, however, about whether BATS can move
ahead with its plans to make acquisitions, provide primary
listings for companies and expand abroad after the company was
forced to pull its own initial public offering late Friday.
If traders feared a meltdown on the BATS exchange Monday,
they didn’t show it. Trading volume in BATS’ bread-and-butter
business of executing stock and equity-option trades was
virtually unchanged from levels before Friday’s hiccup.
It appeared unlikely that the other parts of the company’s
business plan would recover so quickly. BATS had been holding
introductory talks with chief financial officers and heads of
investor relations from several dozen companies about listing on
its exchange, BATS spokesperson Randy Williams said.
While BATS didn’t have companies in its immediate IPO
pipeline, the botched IPO probably will deter companies from
listing on the exchange, even at the cut-rate prices BATS
charges. That would prevent it from stealing business from
rivals Nasdaq and the New York Stock Exchange.
“What company will risk their IPO going to BATS?” said Diego
Perfumo, an analyst with Equity Research Desk. “Who is going to
take that risk?”
Similarly, the incident could derail plans for BATS to make
more strategic acquisitions. Its own IPO was not going to raise
significant cash for the company. But having public shares would
have helped it finance deals.
Another relief for the company: Regulators didn’t see
Friday’s debacle as a major catastrophe or an issue of ongoing
concern, such as was the case for the May 2010 “flash crash.” In
contrast with that sharp plunge in share values, which vaporized
nearly $1 trillion in market capitalization in minutes, what
happened in this mini-crash appeared to be much clearer and
posed no lingering issues for regulators.
Regulators plan to examine the BATS incident in more detail,
but they don’t at present see it connecting to other issues that
they are investigating, such as high-frequency and algorithmic
trading.
“Although the effects of Friday’s technical problem at BATS
were contained, and do not appear to raise the broader types of
market structure concerns associated with the May 6 flash crash,
staff is continuing to review the incident,” U.S. Securities and
Exchange Commission spokesman John Nester said.
That leaves BATS, based in Lenexa, Kansas, with its trading
business and the possibility of getting back on track in the
months ahead.
Since its founding in 2005, the company has grown quickly
with a strategy that takes a page out of Amazon.com’s play book.
BATS’ computers constantly scan the market, dynamically changing
the fees charged and rebates offered to trade in each different
stock and attract traders by offering the most competitive
prices.
And just like Amazon, BATS has been willing to sacrifice
profits by offering occasional deals to trade hot stocks,
betting that new customers who come for the bargains will stick
around for the long haul.
With the high-tech pricing model still in place, BATS
disastrous attempt to list its own IPO as a way to kick-start a
new listings business has not reduced the appeal of its popular
trading platform, market participants said.
“Most transactions are routed electronically. There are not
too many humans pushing buttons to go to BATS,” said Larry Tabb,
chief executive of capital markets research firm TABB Group.
“The reliability and speed of their platform is good.”
BATS’ main business, the source of about 90 percent of its
revenue, is trading U.S. securities listed on major exchanges
such as the New York Stock Exchange and Nasdaq. In February,
BATS captured nearly 11 percent of the market share for trading
U.S. stocks and was the largest European equities market
operator by overall value traded. It plans to move ahead with
that expansion.
The problems that hit BATS’ IPO, whose price dropped to
pennies a share because of a software bug, would not affect the
sophisticated traders who rely on the firm’s trading platform.
“We have control over price execution because we always use
limit orders so we are not worried,” said Paul Weisbruch, vice
president of ETF/Options sales and trading at Street One
Financial, an ETF trade execution firm.
BATS’ future growth plans, however, partly hinged on winning
new listings for its own two U.S. stock exchanges.
The company likely is targeting smaller, more price
sensitive companies for its listing business, analysts said,
offering annual fees of $20,000 to $35,000 for companies whose
stock trades fewer than 2 million shares per day. Bigger issuers
will not be charged an annual fee. That compares with $38,000 to
$500,000 a year on the NYSE and $35,000 to $99,500 a year on the
Nasdaq.
“Anyone who is cost sensitive will evaluate BATS, but then
again you don’t get the prestige of a NYSE or a Nasdaq,” said
Adam Honoré, research director of the institutional securities
practice at Aite Group. “There’s a cost to that too.”
Several of the companies BATS held preliminary talks with
about listing were from the Kansas City area, where the exchange
is located, BATS’ Williams said.
“It would make sense for them if they really want to target
company listings to possibly start in their own backyard first
and build up a portfolio before they expand,” said John Hense,
managing director at Kansas City-based CC Capital Advisors,
which is not working with BATS.
BATS may also be eyeing technology companies as potential
issuers on its exchange as it has tried to market itself as a
technology firm that forced the NYSE and Nasdaq to modernize
their own platforms, said an underwriter.
BATS started operating a primary listings platform earlier
this year on which BlackRock listed eight iShares ETFs.
“We want to bring more ETFs and some corporate issuers but
we understand, particularly from corporate issuers, we have some
work to prove ourselves to them,” said BATS’ Williams.
But fumbling its own IPO probably will make it harder to
attract other IPO business.
“They were their own guinea pig and they failed,” Tabb said.
It is unclear when BATS might try to go public again. BATS
co-founder and board member Dave Cummings said Sunday it should
aim for a listing in the second quarter. But its CEO, Joe
Ratterman, didn’t offer any time table.
Tabb said BATS should try to win an IPO listing from another
company with the promise of putting a big marketing and
advertising push behind it.
BATS’ other growth initiatives include acquisitions,
entering new markets, such as Brazil and Canada, and expanding
into new asset classes, possibly trading U.S. Treasury bonds. It
aims to enter at least two new markets by the end of 2014.
BATS’ operations last year generated $48.2 million in net
cash. At the end of 2011, BATS reported $254.2 million in cash
and cash equivalents and financial investments.
Distractions from the IPO setback could delay BATS’ pending
strategic investments, Tabb said. “Rivals could scoop up any
acquisition BATS may have been looking at,” he said.