MONITOR FIELDREPORT
OCTOBER 15, 2010
BATS GLOBAL MARKETS
What Price Is Right For Second Exchange?
By Tom Steinert-Threlkeld
LENEXA, Kansas — Just outside
Joe Ratterman’s office on the
outskirts of Kansas City, the
closing bell rang 12 times on
October 1.
One peal for each matching
engine his firm, BATS Global
Markets, tyically puts in place
for each securities markets
it operates, which include
electronic equity exchanges in
North America and Europe and
an options exchange for its U.S.
customers.
But today, two weeks later,
it’s the opening bell that mat-
ters. Ratterman’s turning the
latest dozen of its matching en-
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gines live, in support of BATS’
second equities exchange on
this continent.
The new market, known
as BYX, or the Y Exchange,
will not distinguish itself by
new speed records in handling
orders. BATS has put in place
at the Y Exchange the same
technology that underlies its
first market, BZX, aka its Z
Exchange.
“I’ll probably end up disap-
pointing you a little bit,’’ said
Ratterman. “Because the (Y
Exchange) model really is rely-
ing on all of the same elements
of our current market and ap-
Photography by Tom Steinert-Threlkeld
plying a different price point at
this stage.’’
Down the road, BATS
likely will introduce new or-
der-handling mechanisms and
creative ways to prioritize the
orders that come in.
But, on day one, the sole
test of Y Exchange is whether
it can create a “price point” that
appeals to a different group of
traders who will be the “mak-
ers and takers” in BATS new
model.
It’s this second part of
the equation that sometimes
gets forgotten when consider-
ing BATS’ advance over the
FIELDREPORT OCTOBER 15, 2010

No longer an untested startup.

Speed is not all that matters.
past half-decade into the fourth largest equities
exchange in the United States. Now, BATS is
not just an untested startup. It’s driven by the
impetus to grow, to overtake other exchanges
— without endangering the stability and revenue
stream of its primary exchange, in the process.
From A To Z
In the five days ending on Columbus Day,
the Z Exchange handled 8.9 percent of public
trading of equities, behind Nasdaq (17.4%), the
Arca electronic venue of the New York Stock
Exchange (14.6%) and the NYSE itself (14.4%).
Even if you combine the market shares of
Arca and the NYSE, it’s fairly remarkable that a
wholly electronic exchange founded in a vacated
bank building in the middle of the country has, on
the backs of 110 employees in toto, achieved one-
third as much volume as an outfit that has been
the nexus of stock trading in North America for
nearly two centuries.
And it is not just speed — using what
engineering-oriented Ratterman likes to refer to
as “world-class technology” — that has allowed
BATS to make the inroads that it has. The other
big innovation has been how it has “inverted the
pricing model” for how stocks get traded, said
Sang Lee, co-founder and managing partner of
the Aite Group, a research and advice company
based in Boston.
BATS has followed the “maker taker” pric-
ing model developed by an electronic trading
network called Island in 1997. This gives the
providers of liquidity — the people willing to buy
or sell shares as they come onto the market – an
incentive to trade. The provider gets paid to pro-
vide the liquidity, earning a “rebate.” The outfit
wanting to sell or buy shares, but who does not
have a counterparty when entering the market,
pays a fee to get the trade completed.
In the past, the entities wanting to trade
— the customers of brokers, in effect — got to
trade their shares for free. Brokers charged fees
for their services, to the parties taking the other
end.
The winners are, in effect, those firms will-
ing to place so-called “resting orders” for stocks.
These are orders that express a willingness to
buy at a price below the current market price or
sell at above the prevailing price … thus giving
“liquidity” if a firm entering a market wants to
get a transaction done.
BATS’ Z Exchange typically charges 25
cents per 100 shares for companies coming in
taking away liquidity and gives 24-cent rebates to
companies adding liquidity to its market.
The new exchange, however, is aimed at

BATS Global Markets

Headquarters: Lenexa, Kansas

Founded: June 2005

Business: Developer and operator of elec-

tronic markets

Chief Executive: Joe Ratterman

Chief Operating Officer: Chris Isaacson

Principal Businesses: BATS “Z” Exchange, BATS Options Exchange (U.S.), BATS
Europe.

Launching: BATS “Y” Exchange, second U.S. equities exchange. Next: U.S. listings
exchange.

Financials: Not disclosed

Market Share: 8.9 percent of U.S. equities trading

Objectives:
• Improve features and functions of markets
• Innovate in business models
• Lower fees for transactions
• Fast response to customer requests, issues

2
FIELDREPORT OCTOBER 15, 2010
‘A little bit of a sandbox.’
Playground for next winning model.
price-conscious traders, that work in high vol-
umes. Think Charles Schwab or Fidelity Invest-
ments, who can aggregate orders on behalf of
thousands of customers.
For these “trading participants,” the BATS
Y Exchange is not charging for “taking” away
liquidity. In fact, it is offering a rebate of 3 cents
per 100 shares.
Firms “adding” liquidity, who normally get
the rebates, will pay nothing, to participate.
This is “inversion.” This means BATS is tak-
ing a “loss leader” approach to getting traders to
move orders over to its second exchange.
“BYX pricing is designed at attracting and
growing overall equities market share for BATS,’’
the company told Securities Technology Monitor.
“Initially, BATS will lose money on BYX, but in
the long-term we hope to attract a solid customer
base.’’
This is similar to how BATS inverted prices
in the early days of BATZ Z and BATS Europe,
it notes. The customers it won stayed with it,
even after pricing specials ended. The reason?
“Customers had the opportunity to experience
the consistency and reliability of BATS,’’ the
company contends.
Most directly, this pricing model appears in-
tended to undercut its chief rival, among upstart
exchange operators. Direct Edge, which already
operates two equities exchanges, gives providers
of liquidity 26 cents per 100 shares and charges
takers of liquidity 30 cents per hundred on its “X”
Exchange. The rebate goes up, as volumes go up.
But, on its other exchange, Direct Edge
A, the company actually charges 2.5 cents per
hundred shares to providers of liquidity. And
takers of liquidity get the rebate, at 1.5 cents per
hundred.
By BATS’ own ongoing tabulation of
market shares, Direct Edge A and X have 5.1
percent and 5.3 percent of total market volume,
as of Columbus Day. Combined, Direct Edge’s
market share, at 10.4 percent, edges out BATS, at
8.8 percent.
Which is perhaps one reason that Ratterman
says BATS hopes to pick off another two to five
points of market share, with the introduction of
BATS Y.
Counter Moves
But BATS also has to counter moves made
by established exchange operators, as well. BATS
competes, for instance, with NYSE’s Arca elec-
tronic exchange, in its approach to rebates and
fees. And the Y Exchange launches exactly one
week after Nasdaq OMX group launched its third
3
U.S. equities exchange, known as PSX.
That exchange is the first that gives priority
to the largest orders coming into the market,
rather than simply giving priority to the first
orders to come in.
The first-to-market approach, known as the
price-time model, has led to what Lee describes as
wholesale “slicing and dicing” of orders. Because
algorithms can execute orders in thousandths of
seconds, aggressive traders — through their exe-
cution management systems — place hundreds of
simultaneous orders for small amounts of shares
and cancel most of them, when their prices are
not hit. This has, in Nasdaq’s estimate, reduced
the average size of a trade to 220 shares.
The PSX model is designed to reverse that
trend and start building back the size of orders.
On the first of trading, October 8, the average
trade size was nearly triple that, at 578 shares
each.
The moves by Direct Edge, which changed
over its technology platform and launched its
two exchanges in July, Nasdaq OMX and BATS
reflect continuing proliferation of markets for
trading shares in the United States, notes Lee.
But that’s not what’s driving the launch of new
exchanges by Nasdaq and BATS he says.
“They’re trying to figure out what the next
winning model will be,’’ Lee said. “This is a way
to test out different things,’’ without putting any
stress on the operations of their main exchanges.
This is “a little bit of a sandbox,’’ said Jero-
mee Johnson, vice president of market develop-
ment at BATS.
With each new model, “if it works out, great.
If it doesn’t, no big deal,’’ Lee said.
Running In Parallel
But it’s not as if BATS has dropped its at-
tempts to gain market share and beat back rivals,
with swifter or smarter technology.
In fact, the firm announced in early Sep-
tember a move that should combines speed and
smarts.
This is the introduction of what it calls “par-
allel routing” of orders, which sends orders to all
market centers at the same time with the same
quote at the same price.
This is a successor to a routing strategy that
BATS calls the “cycle” method. In that approach,
will route orders to all market centers with a
quote at each price level simultaneously.
In this approach, “we have a priority list of
venues at each price level and we send the order
size to one venue at a time,’’ said Phil Ratterman,
the firm’s vice president of software development
FIELDREPORT OCTOBER 15, 2010
20 percent pop, to start.
Cutting 250 milliseconds in half.
and brother of chief executive Joe Ratterman.
In this method of routing orders, “ if you
have a thousand shares and there’s five venues at
a certain price, then we’ll go to those venues until
we’re either out of liquidity that we need to get
rid of or fill or it’s time to move to the next price
level,’’ he said.
With parallel routing, roughly 60 or 65
venues are hit at a particular price level, at the
same time. The liquidity at all venues is tapped
and then, if shares remain to be moved, the price
is changed and the process repeated.
The first version of this routing strategy
is called Parallel D, a reference to its purpose of
capturing the entire “Depth of Book” at a particu-
lar price level.
Two more versions are coming: Parallel
2D, which emphasizes the fastest execution for
a particular order, and Parallel T, which knows
what number of shares are trading at a given in-
stant in the “top of book” or best price for a stock
and sends out the exact quantity of only the top
quotes to each market. Any unfilled shares get
posted to the BATS book.
And BATS is introducing a series of new
order types as well, designed to attract and keep
more trades within the bounds of its two equities
exchanges.
The first will be referred to as B2B. But, in
this case, it’s not about business-to-business trad-
ing of goods or services. It’s about trading from
one BATS exchange to the other, before going
elsewhere.
According to chief operating officer Chris
Isaacson, customers will be able to route orders
from BZX to BYX or vice versa. Along the way,
CEO Joe Ratterman
(left) and COO Chris
Isaacson: Upgrading
technology and
setting a “differ-
ent price point” to
attract customers to
its second equities
exchange in the
United States.
4
they can designate more than 20 dark pools to be
hit in between. If that doesn’t get the job done,
the orders then go to other public venues to
complete the trade.
After that come Slim and Trim. The “Slim”
order type seeks to minimize costs, but routes
orders to all protected market centers.
The “Trim” order type first looks at low-
cost market centers, as defined by BATS. Then,
orders are routed through a multitude of dark
pools, before coming back to one of the two
BATS exchanges.
Cost is minimized in both cases. But the tac-
tics make it possible, Isaacson says, to move orders,
faster, if there is enough “size in the market” to fill
all shares in the order.
Technology Overhaul
But speed still matters. So does having a new
exchange to launch. In October 2008, that was
BATS Europe. In February 2010, it was BATS
Options, in the U.S. Each time, BATS not just
expanded, it upgraded.
So it is with the BATS Y Exchange. A year
ago, BATS began an internal project to overhaul
its base trading technology. Then, six months
ago, it decided to launch the second exchange.
The launch of the second exchange became
the laboratory for setting up the new technical
platform.
And BATS expects that it will get a 20
percent pop at the start, in lowering the average
time it takes to fill an order on a BATS exchange,
from te present rate of 250 milliseconds. And the
company expects to drop that to 125 milliseconds
FIELDREPORT OCTOBER 15, 2010
10 billion transactions a second.
Finding the revenue to justify it.
by the end of the year, according to Isaacson.
BATS gets the normal boost from the use
of low-cost “commodity” chips that include
increasing numbers of “core” processors on each
square of microcircuitry. The latest IBM server,
known as the x3850, can pack 32 cores into its
X5 chipset.
But the biggest boost, Isaacson said, comes
the speed of throughput in its network. With the
launch of the Y Exchange, BATS will be mov-
ing data from engine to engine at the rate of 10
billion bits of a data second. That is a ten-fold
increase, for members who choose to move up.
And if BATS needs more processing power,
it can just add more matching engines, to line up
buy and sell orders.
Its architecture allows 24 or 36 or more
engines to hook together and work together, as
needed.
And Ratterman (the Phil version) has led
a drive to cut out steps in processing, along the
way, to further boost speed.
Instructions now are copied fewer times, to
fewer memory caches. Message sizes have been
cut down. All told, processing requirements for
a message have been cut 30 percent, compared to
three years ago.
Parallel programming has been an obses-
sion at BATS, from its beginning. This leads to
the ability to handle more orders at the same
time, through simultaneous threads of execution.
Which means, in BATS’ eyes, it can handle the
business. If it comes. Ten billion transactions a
second, with its architecture, is now feasible. But
only if needed.
“There’s no reason to scale our architecture
to ten billion transactions a second if the income,
if the revenue, is not there to justify it,’’ said Phil
Ratterman. At this point, “it’s a business decision
to add more capacity. “
New, But Not Me-too
It’s not like rivals are going to just abdicate
market space.
Nasdaq, for instance, can lay claim to being
more creative in this round of introducing new
exchanges than BATS. Its Price Size Exchange
is “something that is new, unique and innovative.
This model does not exist in the U.S. equities
marketplace today,’’ said Brian Hyndman, senior
vice president of Transaction Services at Nasdaq
OMX Group. With PSX, speed does not put an
order at the first “queue spot.”
Large institutional traders get priority on
the basis of trade size, rather than system alacrity.
The other Ratterman, brother Joe, the CEO,
5
“It isn’t price that is the only
deciding factor. It is reputa-
tion and quality of markets
and latency and performance
and capacity and a whole
host of things. So you have
got to offer the full package.”
—CEO Joe Ratterman
though, recognizes that it’s not just speed and it’s
not just pricing model that matters.
In 2005, BATS had similar “world-class
technology” and it kept adjusting its prices, in the
expectation that there was some sort of magic
combination that would drive customers to its
doors in droves.
But the reality was that BATS was dealing
with large organizations that were comparatively
slow-moving. The key was to give firms willing
to put their orders into the market in the first
place reason to connect. Nothing happens, with-
out those connections.
“It isn’t price that is the only deciding
factor,’’ he said. “It is reputation and quality of
markets and latency and performance and capac-
ity and a whole host of things. So you have got to
offer the full package.”
Which is why BATS repeatedly inverts
prices, to get a market up and running. And why,
in Joe Ratterman’s assessment, the company has
exceeded well beyond its original plan to simply
be a secondary market for equities.
The launch of its second equities exchange is
simple proof of that. But so are its Savvis-housed
data centers in Weehawken, N.J., Nutley, N.J., and
London, England.
The 1,000 square feet that 13 employees went
to work in in 2005 have been replaced by 40,000
square feet of space. That is backed up in what
CEO Ratterman calls a “full functional live sec-
ondary office” in Missouri in event disaster strikes
the primary office.
And, not surprisingly, BATS is looking for
another data center in the United States. And
Ratterman (the CEO) is talking about starting a
futures exchange, as a next step.
After all, if it didn’t have another exchange
to start, it’d have to create one.
“Most of this is about getting more flexibil-
ity, to try things,” Lee said.
Or, in BATS’ case, to test not just pricing,
but a next round of technology, before it gets
launched to all its markets.
FIELDREPORT OCTOBER 15, 2010
Deducting for Downtime
LENEXA, Kansas — BATS Global Markets has a
way of focusing every employee’s minds and efforts
on keeping its equities and options exchanges up and
running at all times. Compensation. Every employee,
from engineer to public relations specialist, gets a
monthly bonus, based on performance. If there’s
downtime, everyone gets docked.
Chris Isaacson is the company’s chief oper-
ating officer; Phil Ratterman, its vice president
of software development; and Stacie Fleming, a
communications specialist.
Isaacson: If we have 100% up time, it’s part of the
compensation package for us. We’ve had a great
record.
STM: Part of the compensation package. How does
that tie back to outages?
Isaacson: It’s for the entire company. Everyone
wins at BATS if we have systems that run.
Ratterman: One hundred percent up time.
Isaacson: Hundred percent up time.
STM: So how many months out of the year do you
have 100% up time and how many times has the
system gone down during trading hours?
Isaacson: On BZX equities I believe we’ve had
one or two outages. And an outage is more than
60 seconds of down time here in core trading hours.
STM: One or two outages over what period?
BATS is completing its first year as the title sponsor of the Crown Club at Kauffman Stadium, home of the Kansas City Royals.
Isaacson: Over this year. And I think we have had
six months—September was our sixth month in a
row—without an outage in equities.
STM: An outage is over 60 seconds in what?
Isaacson: Over 60 seconds of down time, which
is anything that’s material to our customers. That
includes, you know, routing to a single venue. We’re
very, very stringent.
Ratterman: If we don’t have a path to one
venue and if we cannot route to a single venue, for
example, that would be considered —
Isaacson: That’s an outage. Even though that
may only affect 20 members out of 403, that’s still
an outage.
STM: Or one market data read out.
Isaacson: Yeah.
Ratterman: And the vast majority of our outages
are ones which our members don’t know about.
Isaacson: Yeah.
STM: This factors into your monthly bonuses or
quarterly bonuses or annual bonuses?
Isaacson: It goes into quarterly (bonuses).
STM: That’s across the board for everybody?
Ratterman: Yes.
Isaacson: Yeah.
STM: Does everybody get bonuses. Stacie?
Fleming: Yeah, as far as I know.
STM: Everybody gets a bonus?
Ratterman: Lunch is guaranteed, everything else
is a bonus [Joking]. And it’s every quarter, so you
best hold on to it.