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Wedbush Sees No Bats Losses as Board Reviews IPO

March 27, 2012

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Bats Global Markets Inc. (BATS), whose board is preparing to review last week’s failed initial public offering, should weather any retreat in stock trading as the IPO debacle recedes, said Edward Wedbush, whose firm owns a stake in the nation’s third-largest operator of equities venues.

“If it were to decline consistently, then there’s going to be a longer period of time where they need to regain confidence,” Wedbush, president of Wedbush Securities Inc., said in a Bloomberg Television interview yesterday. “It’s my estimate that that will not happen, that the exchange will do its normal percentage of business.”

Bats’s two exchanges handled 10.27 percent of U.S. volume yesterday, down from this year’s average of 11 percent and the fourth-lowest level of 2012, data compiled by Bloomberg show. On March 23, when the Lenexa, Kansas-based company failed to complete its IPO, Bats had 9.20 percent of volume.

Joe Ratterman, the chief executive officer, withdrew the IPO after a computer malfunction kept Bats from trading on its own platform and forced a halt in Apple Inc. (AAPL), the world’s biggest company by market value. Transactions in Apple and trades for more than 1 million Bats shares were later voided. A computer error related to IPO auctions caused the disruption, according to Bats.

Board Nominee

Wedbush’s son, Gary Wedbush, is a nominee to the Bats board, according to the exchange operator’s IPO prospectus. Gary is executive vice president of capital markets at Wedbush Securities, whose parent company Wedbush Inc. owns a Bats stake.

The board moved up a meeting to today from next week at which they plan to review the IPO, according to a person with direct knowledge of the matter who declined to be identified because the discussions are private.

Directors will also discuss a $100 million dividend to owners that had been part of the deal, according to another person with direct knowledge. Bats approved a cash dividend of $100 million “as a return of capital” to shareholders on Feb. 22, “conditioned upon the successful completion of this offering,” according to the Bats prospectus. Ratterman said in a March 24 phone interview that it had not been paid. Stacie Fleming, a spokeswoman, declined to comment.

Bats captured 10.9 percent of U.S. volume a day last week, including the March 23 decline, data compiled by Bloomberg show.

Options Market

The company also runs a U.S. options market and two European venues that together accounted averaged about 23 percent of trading based on value over the last five days, according to the company’s website. It had 25.4 percent of European stock trading yesterday. Only markets run by London Stock Exchange Group Plc have more trading in the past five days.

“We’re extremely pleased that market share has held up well today, with our U.S. market in line with our five-day average and our Europe market slightly higher than normal,” Randy Williams, a Bats spokesman, said in an e-mail yesterday. “While we realize that we must work to fully regain the trust of the market, it is good to see customers respond as they have.”

Underwriters including three of Bats’s owners, Morgan Stanley, Citigroup Inc. and Credit Suisse Group AG, priced 6.3 million shares on March 22 and the stock was ready to begin trading a day later when one of its computers malfunctioned, triggering events that ended with the IPO’s cancellation. While the company reported its opening transaction for $15.25 a share at 10:45 a.m. New York time on its website, feeds including those sent to Bloomberg LP displayed different prices as a result of the error related to the auction process.

Apple Trade

Compounding the confusion, a single transaction for 100 shares executed on a Bats venue briefly sent Apple, which has a market value of $565.9 billion, down more than 9 percent, setting off a circuit breaker that halted the stock everywhere in the country for five minutes. The shares rebounded and the errant trade at 10:57 a.m., along with all transactions in Bats shares, were later voided.

“There are going to be isolated events at the different market centers over time,” Ratterman said in a March 24 interview. “We’ve had historically very few instances where our systems have gone down, but they have gone down in different ways in the past like every other venue. I don’t think this is anything new as much as it was under a bright spotlight.”

Exchange Downtime

BZX Exchange, its main market, was accessible to users 99.94 percent of the time last year, according to a regulatory filing. BYX Exchange, its second market, was available 99.998 percent of the time, the company said. The main market processed an average of about 29,000 order messages per second.

“You may not see a huge hit in Bats’s volume, but this certainly impacts their ability to grow market share in the U.S.,” Christopher Nagy, managing director for order strategy at TD Ameritrade Holding Corp. in Omaha, Nebraska, said in a phone interview. “It’s not a technology issue but a capability issue -- the capability to bring an IPO to the market. Clearly they failed in that paradigm.”

Bats’s share of U.S. equities volume was 11.3 percent last year, up from 10.2 percent in 2010 and 10.5 percent in 2009, according to filings from the company.

The exchange operator should suspend its corporate listings business, according to Issuer Advisory Group LLC’s Patrick Healy, who advises companies seeking to go public. No companies yet call Bats their home market. Bats would have been the first.

ETF Listings

The company could continue to bring exchange-traded funds to market while it rebuilds its reputation “for a return to this space at a later date,” he said yesterday in an e-mail to clients. Healy’s company has offices in Chevy Chase, Maryland, and New York. Bats has nine ETFs.

“This development casts severe doubt upon Bats’s credibility as a reliable listing venue for publicly traded companies,” said Healy, who is on the board of the exchanges operated by Direct Edge Holdings LLC, which compete with those run by Bats. Healy previously praised Bats’s plans to list companies. “It’s unlikely that any CEO would find the listing risks to be acceptable,” he said in the e-mail.

Almost 11 percent of U.S. share volume in February occurred on venues run by Bats, which called itself “a technology company at our core” in the IPO prospectus. Its founder, Dave Cummings, sent an e-mail to traders on March 25 saying that while Bats should suspend employee bonuses, the incident was no reason to dismantle the current equities market structure.

“Friday’s trading disturbances should not erode investor confidence in electronic trading or U.S. capital markets,” Chad Morganlander, a Florham Park, New Jersey-based money manager at Stifel Nicolaus & Co., which oversees more than $116 billion in client assets, said March 25 in a phone interview. “The market should be allowed to heal on its on and work through this.”

To contact the reporter on this story: Nina Mehta in New York at

To contact the editor responsible for this story: Nick Baker at

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