Bloomberg News

Bats Share of U.S. Equity Trading Rebounds

March 27, 2012

Bats Global Markets Inc. (BATS:US), whose board is reviewing last week’s failed initial public offering, saw its share of U.S. equity trading rise today.

Bats’s two exchanges handled 10.67 percent of U.S. volume as of 5 p.m. New York time, according to data compiled by Bloomberg. That compares with 10.27 percent yesterday and 9.2 percent on March 23, when the Lenexa, Kansas-based company failed to complete its IPO.

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

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:US), 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.

Exchanges, Dark Pools

The company’s share of U.S. trading amounted to 10.27 percent yesterday, or 0.77 point less than the 2012 average through March 22, data compiled by Bloomberg show. Direct Edge Holdings LLC, which also runs two American equity exchanges, saw its proportion drop 0.7 point from the annual mean to 8.7 percent. Nasdaq OMX Group Inc. (NDAQ:US) was 0.47 percent less than average at 20.76 percent, while NYSE Euronext (NYX:US) was 0.07 point above at 23.66 percent, data compiled by Bloomberg show.

Trading shifted yesterday to private venues known as dark pools and securities firms’ own systems. Volume handled off exchanges and tallied by so-called trade reporting facilities was 35.46 percent of the total, or 1.72 point more than the 2012 average prior to Bats’s failed IPO. The figure fell to 34.16 percent today.

“It’s great to see market share back in the normal range and we remain thankful to our customers for their continued support,” Randy Williams, a Bats spokesman, wrote in an e-mail.

Board Meeting

Bats’s board planned to meet today 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, 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 hadn’t been paid. Stacie Fleming, a company spokeswoman, declined to comment yesterday on the board meeting.

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 Shares

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.”

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.”

To contact the reporter on this story: Nina Mehta in New York at nmehta24@bloomberg.net

To contact the editor responsible for this story: Nick Baker at nbaker7@bloomberg.net


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