Just off I-35, a global financial powerhouse
From nondescript Lenexa building, BATS runs the country's third-biggest stock exchange
Randy Williams, VP of Global Communications for BATS.
Wednesday, January 13, 2010
As you drive south on I-35 into south Johnson County, you pass the usual suspects of interstate proximity. Neon sign after neon sign, glaring storefront after glaring storefront, these reliably frequent commercial centers line the highway like Potemkin villages of capitalism. There's Costco on your right, and a mattress warehouse on your left. And there, nestled placidly at 80th Street in a fairly nondescript office building, sits America's third-largest stock exchange.
Surprised?
You shouldn't be. Since its founding in June 2005, BATS Exchange Inc. (the acronym stands for Better Alternative Trading System) has successfully challenged the industry titans in New York to grab just under 10 percent of the daily trading volume in the United States. With offices in New York and London and an eye on the expanding options market and burgeoning listings service, BATS has asserted itself as a major competitor whose services rival those of its better-known cousins: the NYSE and NASDAQ, whose mammoth resources and outsize reputations also make them vulnerable to challenges from upstarts.
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BATS Exchange
BATS Exchange, Kansas City headquarters.
And one of the more successful upstarts happens to be BATS, whose place in the somewhat sleepy suburb of Lenexa seems incongruous at best. The company, which was founded by Tradebot CEO Dave Cummings in 2005, uses sheer computing force and a commitment to quality customer service — dare we reference Midwestern friendliness? — to play David to the various coastal Goliaths. It achieved a position of industry preeminence the old-fashioned way: by exploiting loopholes in extant market structures.
In 2005, NYSE had just purchased Archipelago and NASDAQ had just swallowed Island, two of the most innovative trading exchanges who used a focus on efficiency to grab market share. Post-buyout, though, the insurrectionists had little incentive to compete with the big exchanges on price, leaving a market hole just asking to be filled by a company with a pioneering focus on cost and quality.
Enter BATS.
"In 2005, the opportunity was there for smart people to seize the opportunity in the market," said Randy Williams, the vice-president for global communications at BATS. "People were looking for an alternative to the duopoly, and we provided an innovative and cost-friendly option. Within a year, we were doing a billion shares a day."
A timely gap in market alternatives, however, can only take a company so far. In order to successfully challenge NYSE and NASDAQ, BATS snapped up some of the best technical and software talent in the region and designed what they consider to be the world's best trading technology. With just under 100 employees — 63 of whom are based in Kansas City, and many of whom are drawn from state schools like the Universities of Kansas and Missouri — BATS has managed to shrink even further the ever-closing gap between a trade's order and a trade's execution.
"We have the same efficiency and level of service the day after Thanksgiving (a traditionally slow trading day) as we do on the busiest day of the year," Williams said. "Our customers expect the same efficient performance, and they need consistent speed every time. We want our worst-case, our biggest outlier, to be better than anyone else's."
On top of efficiency, though, the company also engaged in a tactic more suited to retail than finance: discounts. For one month, traders and broker-dealers received discounts as BATS tried to prove its mettle to the nation's biggest clients. At the end of the discount period, the company kept the clients and attracted new ones.
Ventures like BATS are a natural reaction to market inefficiencies, says Stephen Pruitt, PhD, professor of finance at the Bloch School of Business at UMKC.
"They absolutely make markets better. Anytime you're able to exploit tiny deviations, you improve the efficiency of the marketplace," he said. "And we'll continue to see things like this. Anytime there's a buck to be made, some bright guy or girl will emerge to do it."
One obvious question emerges in any discussion about BATS: why Kansas City? When the world's financial epicenters lie on Wall Street and in the City of London, why opt for a city whose barbecue is more well-known than its relevance to Adam Smith? The reasons, it turns out, are exactly what you'd expect from a company that prides itself on efficiency and low cost: it's cheaper.
"The square footage cost is much lower, and the resources in terms of people and technology professionals is great," Williams said.
Noting that other companies whose focus is on efficient streamlined technology — Cerner, DST, H&R Block — are also located in the metro area, the company actually considers it an advantage to be distanced from the commercially incestuous world of Manhattan. It may be good, too, that BATS is not adjacent to NASDAQ; founder Dave Cummings was once known for his bellicose e-mails to customers in which he did not spare the rival exchange from his withering critiques. In one notorious e-mail, he described NASDAQ's bid for the London Stock Exchange the "biggest blunder of 2007" and called the exchange's actions "laughable." (The rival called the comments "batty"). Now, Williams stressed, the three large exchanges have a competitive but amiable relationship. (NASDAQ declined to comment for this story.)
Even with its geographic separation from Wall Street, it's impossible for BATS or any other financial company to deny that the industry's reputation is at its lowest point in years, and perhaps decades. Regulation enthusiasts are calling for leashes to be put on finance's biggest dogs while grandstanding politicians clamor to shout the most vocal denouncement of "fat cats" and "greedy bankers." Even the eminent policymaker and former Federal Reserve chief Paul Volcker said last month that the most important financial innovation of the past two decades is the ATM, and that he has yet to see "one shred" of neutral evidence connecting financial innovation and the growth of the economy.
While BATS doesn't deal in the toxic investments that are widely blamed for the financial crisis — CDSs, CDOs, and a host of other headache-inducing initializations — it defends its reputation and advances in innovation by simply noting that positivity doesn't sell newspapers.
"The good people on Wall Street outnumber the bad ten to one, but that doesn't create sexy headlines," Williams said. "Trading has a lot of minutiae, and people often don't have time to understand it. We educate our clients as much as possible. Making money is not our overarching goal. We want to make markets better, and try to do things for the good of the overall market."
One of the great, tired tropes of today's financial coverage is the following phrase: "the disconnect between Wall Street and Main Street." At a time when the former is reaping record profits while the latter has yet to see the effects of the recession's end, should the good of the overall market be the stated goal? Worth noting is that the list of BATS equity partners includes some of the crash's most notorious players, including Lehman Brothers and Morgan Stanley, and that pending financial regulation reform may affect the operation of small exchanges. Moderate economist Alan Blinder recently wrote in the Wall Street Journal that "history shows that financial markets have a remarkable ability to forget the past and revert to their bad old ways. And we've made essentially no progress on lasting financial reform."
It's often hard to reconcile bare-knuckled capitalism and professed altruism, and it's important to note that improving the good of the overall market will likely lead to increased profits for BATS and the other exchanges. So is Williams' claim that the company's "heart is in the right place" just one more placation from the industry that broke the world? Maybe; maybe not. But it's hard to imagine, as one walks through the quiet cubicles of BATS where employees pad around in jeans, that this Kansas City company is even remotely related to white-shoe stalwarts like Goldman and Barclays.
"There's no way we're ever leaving Kansas City," Williams said. "You probably couldn't find five people here who would be willing to leave. Our entire company is based on this city's identity. We're not leaving."
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