Bats Targets NYSE & Nasdaq With New Offering

Firm says offering is in response to rising fees at closing auctions on other exchanges.

Reviewed by: John McCrank
Edited by: John McCrank

New York (Reuters) – The No. 2 U.S. exchange operator Bats said on Monday it plans to offer a cheaper alternative to the closing auctions for New York Stock Exchange- and Nasdaq-listed securities, taking aim at one of the busiest and most lucrative trading periods of the day.

Bats, owned by CBOE Holdings, which also owns, said its end-of-day matching process for non-Bats listed securities was in response to frustration voiced by industry participants toward rising closing auction trading fees on other exchanges.

Closing auctions attract massive volume from fund managers that price their assets to the closing prices of listing exchanges and execute the bulk of their orders at that time.

Closing Auction Volume Surging

Daily volume in closing auctions has risen more than 70%, to almost 350 million shares, in the past five years, Bats said. Fees for closing auctions have increased from 16% to 60% at the NYSE and Nasdaq respectively, in that period, the exchange said.

Nasdaq and NYSE, which is owned by Intercontinental Exchange, list nearly all corporate stocks, and much of their trading volume occurs during their opening and closing auctions.

A bigger share of end-of-day volume could help Bats overtake NYSE as the No. 1 exchange operator and extend its lead on Nasdaq. Bats has an 18.4% market share, compared with 21.7% for NYSE and 18.1% for Nasdaq, according to Bats data.

Intraday Day Trading Fees Have Dropped

"Over the past few years, we have seen the primary market auction operators steadily increasing auction fees while, conversely, intraday exchange trading fees have steadily dropped as a result of competition,” said Bryan Harkins, head of U.S. Equities and Global FX at Bats.

“This has made a critical part of the trading day markedly more expensive. As a result, market participants have asked us to provide competitive pressure of the sort that we apply during the trading day,” he added. “The Bats Market Close is our response that provides an alternative that reduces costs for market orders but preserves a single, consolidated closing price, all through an exchange platform."

NYSE said the move by Bats, which needs regulatory approval, would harm the market.

"Bats' proposal would fragment the closing auction and impair price discovery, while increasing the cost-of-capital for listed companies, and increasing trading costs for investors," said Stacey Cunningham, NYSE's chief operating officer.

Nasdaq declined to comment.

Bats said its end-of-day matching process will not distort price formation because it will not apply to price-setting limit-on-close orders.

Matching Market-On-Close Orders

The Bats offering will let market participants route market-on-close (MOC) orders to Bats, where they will be prematched with other MOC orders 25 minutes before the 4 p.m. market close.

The prematched trades will be executed when the primary exchanges' closing prices are published, giving participants closing prices for a fraction of the cost, Bats said.

Unmatched orders could be sent to the primary exchanges' closing auctions for execution.

Some brokers already offer MOC prices for investors, but Bats would be the first exchange to do so.