BATS Showing ETF Incentives Work

BATS Showing ETF Incentives Work

The exchange is winning listings and trading traffic with aggressive tactics.

Reviewed by: Cinthia Murphy
Edited by: Cinthia Murphy

BATS Global Markets is aggressively seeking new ETF listings. This fall, the Kansas City, Missouri-based exchange implemented an incentive program that offers ETF issuers anywhere from $3,000 to $400,000 a year per fund listed on BATS, based on volume thresholds. That’s unheard of in an industry known for having issuers be the ones paying to list.

Since its inception in October, the BATS ETF Marketplace program, as it’s called, has proven effective, attracting more than a dozen new funds to BATS’ board from issuers such as iShares, WisdomTree and Elkhorn.

Aside from a growing number of listings, today BATS commands nearly half of all ETF trading taking place on exchanges—an impressive feat for an exchange that not long ago was under high regulatory scrutiny for its reliance on high-frequency trading firms, and it even settled one SEC investigation by paying a $15 million fine earlier this year.

Now, BATS is showing it’s ready to gain market share, one ETF listing at a time. We caught up with Laura Morrison, senior vice president and global head of exchange-traded products for BATS, to talk about what’s going on in Kansas City. Before BATS implemented an ETF-listing incentive program this fall, what was the biggest challenge to attracting ETF listings to the exchange?

Laura Morrison: I would say the largest challenge to attracting ETF listings and new issuers who hadn't tried BATS in the past was, frankly, building that relationship, that trust and that confidence in our marketplace. It's a highly competitive environment in terms of looking to win listings. But we felt at BATS that we could provide better services on both the pre-launch experience and the post-launch commitment. What other advantages or benefits do issuers get from listing on BATS as opposed to Nasdaq or NYSE Arca, beyond the incentive?

Morrison: We certainly compete in price. We have the ability to do that because of our low-cost structure within the BATS organization. We have fewer than 300 employees across the entire company, so we can do things from a pricing perspective that arguably our competitors may not do or may not be willing to do.

Pricing aside, it's about confidence in our systems, reliability, uptime. The capabilities of our low latency is why market makers decide to route here—they’re looking for the best market quality and speed of trading.

We also work on behalf of issuers with products that are a little more difficult to bring to market. As you know, there are 1,800 products out there. A lot have already been done. So, the new and unique-type products take a little bit more time and attention from both the business side of the ETF team as well as our counsel. We are committed to that process. I saw a statistic that about 45% of all ETF trading that occurs on an exchange goes through BATS today. If you take into account off-exchange trading, BATS’ market share is about 28%. And yet you don’t have a huge number of listings. How do you command such trading volume? Is it all thanks to high-frequency trading?

Morrison: True. It's not a huge number—we are nearing 50 ETFs listed in the U.S. on BATS and 11 in Europe. But the reason is, 1) the capabilities of our systems and the desire of market makers to execute on our platform because they know they'll receive the best execution here versus sending the orders elsewhere.

Secondly, we have a unique mix of flow that comes to our platform. Many people don't realize that we attract most of the retail flow that would come directly to an exchange. We're the top retail destination from firms such as Fidelity, Etrade, Ameritrade—consistently, quarter after quarter.

That combination of different types of flow that come into our exchanges from retail, to broker and wholesaler, to agency, to proprietary, to market maker is attractive to ETF traders, who are largely professional traders. High-frequency trading got a lot of bad rap in recent years, but that’s one of BATS’ defining traits, right? Is it your view that good execution in ETFs requires high-frequency trading?

Morrison: Yes, it is. One of the main stats that firms such as Fidelity and Scottrade look at—and frankly, any member firm that's routing flows on behalf of its clients—is effective spreads. If you look at the top 100 ETFs, regardless of where they're primarily listed, nearly half of all those ETFs find the best market quality on BATS when it comes to the lowest effective spread numbers that we publish. That information is available on our website.

That number is one of the main numbers that's presented to the best-execution committees these firms have in-house, and a number they need to report as to why they route orders to various exchanges and locations. Beyond execution, does it matter to an investor where an ETF is listed in this era of electronic trading?
It does because of the market quality that a platform offers. While the end investor may not appreciate the micromarket structure aspects of, say, how the auction works on BATS compared to the auction on NYSE or Nasdaq, or even the best execution stats that are available, it matters.

That's one of the key concerns that the exchange-traded product issuers factor in when they make a decision on where their product will primarily list. Frankly, some are just looking to diversify their listing venues. But BATS’ drive to expand listings is bringing added competition to the market, and that only helps issuers and end investors. Since the incentive program took effect Oct. 1, we’ve seen a big jump in the number of listings on BATS. How does BATS benefit from paying issuers as much as $400,000 a year to list one ETF? It's a lot of money.

Morrison: We earn our revenue from transaction fees, from the trading that occurs in the products that are primarily listed on our exchange. So, when a product transfers to BATS, or primarily lists on BATS from its origin, typically the market share of that product in the auctions is pretty high. And the opportunity for the transaction fees that we can earn intraday and during auctions is where our source of revenue comes from. From an issuer perspective, if the incentive is based on volume, the payment is retroactive, right? So, they don't know upfront what the size of their incentive will be.

Morrison: That's correct. When a new product comes to market, it's not uncommon for it to take time to gain traction and build in assets, as well as build in trading volume. Every product that comes to market as a new launch won't meet the levels of the incentives at inception. The minimum consolidated average daily volume has to be 1 million before our incentive program kicks in. What's the ETF with the highest daily trading volume on BATS today?

Morrison: On BATS primarily listed is the iShares MSCI India ETF (INDA | C-96). I would think that all of this effort BATS is putting into attracting ETF listings is tied to a belief that the ETF market is only going to grow from here.

Morrison: That's right. And that’s what we're entirely focused on: ETF listings. We don't have the distraction of looking to attract corporate listings as well. It's all about the market structure, improving market structure as it relates to specifically what's unique about ETFs and how they trade.

Contact Cinthia Murphy at [email protected].

Cinthia Murphy is head of digital experience, advocating for the user in all that does. She previously served as managing editor and writer for, specializing in ETF content and multimedia. Cinthia’s experience includes time at Dow Jones and former BridgeNews, covering commodity futures markets in Chicago and Brazil equities in Sao Paulo. She has a bachelor’s degree in journalism from the University of Missouri-Columbia.