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Bats BZX Exchange, C2 Options to Change Fee Structure

Monday, October 25, 2010

Oct. 25 (Bloomberg) -- Bats Global Markets, the Kansas City, Missouri-based exchange that accounted for about 10 percent of U.S. equities volume in September, will raise fees and rebates for users of its Bats BZX Exchange in November.

Bats BZX Exchange will charge anyone executing against orders on the platform 28 cents for 100 shares, up from 25 cents now. It will rebate traders and investors who supply bids and offers 27 cents for 100 shares, up from 24 cents, according to a statement on PR Newswire. Since Bats is boosting its fees and rebates by the same amount, its profit on each transaction will stay the same.

Thirteen U.S. stock exchanges, including one started this month by Bats and one by Nasdaq OMX Group Inc., are battling to attract orders in a fragmented market dominated by electronic traders. Markets try to differentiate themselves based on their rules, fees and how they match orders. Among major exchange operators, Bats has made the fewest fee changes in the last three years. NYSE Euronext, Nasdaq OMX Group Inc. and Direct Edge Holdings LLC have altered their pricing more frequently.

“Their old pricing was an attempt to satisfy separate constituencies with one pricing schedule,” said Justin Schack, a director in market structure analysis at institutional broker Rosenblatt Securities Inc. in New York. “Now that Bats has two markets, they can more finely tune their pricing in each market to those groups.”

Finding Balance

Exchanges must find a balance between rebates high enough to attract bids and offers from automated market makers and fees low enough to attract broker algorithms, strategies that transact larger orders in smaller pieces to avoid moving the price, Schack said. Most markets use the execution fee to fund the rebates they provide.

Bats’ other market, Bats BYX Exchange, gives a 3-cent rebate per 100 shares to investors trading against orders at the venue. This inverts the traditional model in which such customers would normally pay to access liquidity.

BYX competes with EDGA Exchange, Nasdaq OMX BX and CBOE Stock Exchange for orders from brokers and customers interested in paying less to trade immediately. NYSE Euronext and Nasdaq OMX are based in New York. CBOE Holdings Inc., which also operates a stock market, has its headquarters in Chicago.

Execution Pricing

“There’s greater recognition on the part of market participants that what you pay for executions matters and can add up to a lot of money,” Schack said. “Brokers are managing their margins by trading on markets where access fees are lower.”

With more brokers turning to lower-cost venues, EDGA for the first time outpaced EDGX Exchange volume this month through Oct. 22, according to Rafi Reguer, a spokesman for Jersey City, New Jersey-based Direct Edge, which operates the markets. EDGX’s pricing is higher than EDGA’s. CBSX, one of the smaller stock markets, pays the highest rebate to those trading against bids and offers in many active stocks and exchange-traded funds.

Exchanges are also trying to distinguish themselves by attracting larger trades. The New York Stock Exchange began providing investors with information about the availability of orders totaling at least 10,000 shares earlier this month. NYSE Amex, another market run by NYSE Euronext, introduced pricing that rewards firms for placing larger orders in certain securities. Nasdaq OMX PSX offers a new scheme for matching buy and sell orders that benefits firms willing to trade more shares.

Options Orders

Separately, a new equity derivatives market from CBOE Holdings set to begin trading on Oct. 29 said it will use maker- taker pricing employed by rivals of the Chicago Board Options Exchange. Unlike the CBOE, the oldest and largest bourse, C2 Options Exchange will have different pricing for liquidity providers and takers. C2 will be the ninth options market, more than doubling the number a decade ago.

Maker-taker pricing is becoming more attractive to liquidity providers in the options markets in part because volatility is declining, Schack said. When volatility is higher, market makers don’t object to paying discount brokers for order flow because the spread between the bid and offer prices is bigger, translating into more profit.

As volatility and spreads decrease, they may want to get more money through rebates, he said. C2 will also trade options electronically on the Standard & Poor’s 500 Index, which are currently only available on CBOE.

Christopher Allen, an analyst at Ticonderoga Securities LLC in New York, said at a conference earlier this month that options exchange have proliferated to the point where potential shareholders may be driven away. He said three or four markets would be better than the current eight.

“There’s more experimentation and frankly more competition among exchanges” as new venues appear, Schack said. “It’s getting more intense.”

--Editor: Nick Baker, Chris Nagi

To contact the reporter on this story: Nina Mehta in New York at

To contact the editor responsible for this story: Nick Baker at

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