Bloomberg News

Bats Pushes Derivatives, New Markets as It Reviews IPO

April 01, 2012

Bats Global Markets Inc. (BATS:US) will offer derivatives trading in Europe and push growth in markets such as Brazil as the third-largest U.S. equity-exchange operator seeks to re-establish credibility after a technical glitch forced it to cancel its initial public offering.

Bats, which also runs the biggest pan-European market after its purchase of Chi-X Europe, could trade derivatives in London as soon as the fourth quarter, Mark Hemsley, chief executive officer of Bats Chi-X Europe, said in an interview. The Lenexa, Kansas-based company is pressing ahead with its plans and will decide on a European clearinghouse to process the transactions in the third quarter. Equity-based contracts will probably be the first to be introduced, he said.

“The best thing the company can do is focus on the underlying business and look at future business-growth opportunities,” Hemsley said. “We are looking at Brazil, at expanding into foreign exchange and bonds -- especially U.S. Treasuries. In Europe, we are focused on the Chi-X integration and looking at derivatives.”

The six-year-old equity exchange canceled its initial public offering on March 23, stunning Wall Street after errors on its computer systems kept its own stock from trading and forced a halt in Apple (AAPL:US) Inc. shares.

Data received by Bloomberg around 11 a.m. in New York showed the stock, the first ever listed on its market, quoted at less than a penny after being priced in the IPO at $16. Around the same time, a 100-share transaction in Apple was executed on Bats so far away from the market price that it triggered a halt.

‘No Change’

“We are looking at driving the profitability of the existing business” as Bats reviews the events of that day, Hemsley said. “Secondly, we are looking at growth in new markets, through new geographies and new products. There is no reason to change the business strategy.”

Bats, whose name stands for Better Alternative Trading System, rose to prominence in tandem with the proliferation of electronic firms that now dominate the buying and selling of equities in the U.S.

The canceled stock offering was intended to raise money for Bats’s owners, which include underwriters Morgan Stanley, Credit Suisse Group AG and Citigroup Inc. Others that expected to see proceeds from the deal were Chicago-based Getco LLC, Wedbush Inc. in Los Angeles, and high-frequency firm Tradebot Systems Inc., whose chief executive officer founded Bats. The estate of Lehman Brothers Holdings Inc. is also among the biggest owners.

‘Logic Still There’

“The logic for an IPO is still there,” Hemsley said. “If we hadn’t had a technical issue we’d be a publicly listed company today.”

Bats planned to make its own shares the first corporate listing on its exchange. NYSE Euronext and Nasdaq OMX Group Inc. own the home venues for the rest of the U.S. stock market.

“We’ll review what we do in listings in the U.S.,” Hemsley said. “In Europe, our thinking was that if we offer listings it will be around exchange traded funds. The business is different in Europe than the U.S. because in the U.S. there at least there’s a single regulator, a single legal framework, a single set of listing requirements and a single language.”

Founded by a high-frequency trader in 2005, Bats was steered to prominence by brokers trying to hold down fees as the New York Stock Exchange and Nasdaq Stock Market bought their biggest electronic rivals.

New Markets

Bats plans to enter at least two new markets by the end of 2014, according to a February Securities and Exchange Commission filing, and is considering an expansion into Treasuries, foreign exchange and U.S. futures. The company has also said it’s exploring the possibility of creating a Brazilian exchange with a Sao Paulo-based asset manager.

The company was trying to raise money less than two years after a crash erased $862 billion in 20 minutes from U.S. share values, a plunge that critics linked to the fragmented market structure that helped Bats thrive. The company was initially built to service high-frequency firms like Tradebot Systems. Automated trading firm Getco and Wedbush., owner of an investment bank whose clients include high-speed firms, bought equity stakes.

Bats is talking to clearinghouses including LCH.Clearnet Group Ltd. and Deutsche Boerse AG’s Eurex Clearing as it seeks to offer derivatives trading in London.

“With the opportunities for derivatives, the key is sorting out clearing in Europe,” Hemsley said. “I don’t think we want to go down the route of setting up our own clearinghouse -- that’s not where our expertise is. If we did something it would be in partnership.”

To contact the reporter on this story: Nandini Sukumar in London at nsukumar@bloomberg.net

To contact the editor responsible for this story: Andrew Rummer at arummer@bloomberg.net


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