For years U.S. companies had few choices when deciding where to list their shares. They could opt to join the venerable New York Stock Exchange, now operated by NYSE Euronext, or they could sign onto the tech-savvy Nasdaq Stock Market, run by global powerhouse Nasdaq OMX Group. By the end of this year, however, U.S. companies considering an initial public offering will have a new option. On August 30, Kansas City, Missouri–based Bats Global Markets announced that it had received permission from the Securities and Exchange Commission to launch a listings service, which it plans to roll out in December.
The approval symbolizes a new highwater mark for Bats, which was founded in 2005 and now operates two U.S. stock exchanges, an equity options market and BATS Europe, a pan-European equity-trading platform in London. As the third-largest equity exchange operator in the U.S. based on monthly trading volume, Bats has carved out 12.29 percent market share in U.S. equities, trailing only NYSE Euronext, with 27.83 percent and Nasdaq, with 19.06, according to data from New York–based agency broker Rosenblatt Securities.
Listings, which rely heavily on the marketing power and brand-name visibility of the incumbent exchanges, have long been unscathed by the technology wars that have revolutionized every other aspect of equity trading in the U.S. and Europe over the past decade. That may be about to change. As a new generation of alternative stock exchanges like Bats mature, their managers are beginning to seek out diversified sources of revenue to supplement their core equity-trading businesses.
Joe Ratterman, Bats’ chairman, president and CEO, believes that the U.S. listings business is overdue for some competitive pressure. Just how competitive? Bats’ listings are priced to compete head-on with the largest incumbents, NYSE Euronext and Nasdaq. Nasdaq currently charges top-tier companies an initial fee of up to $225,000 to join and annual fees that can run as high as $99,500, depending on the number of shares issued. NYSE’s fees are even richer. Top-tier companies seeking to list on the storied New York Stock Exchange can expect to pay up to $250,000 in initial fees based on their share issuance; annual fees for the largest companies cost up to $500,000 a year, depending on the number of shares outstanding. By comparison, top-tier issuers on Bats will be expected to pay an initial joining fee of just $100,000 and a flat annual fee of $35,000.
But low cost alone will not ensure Bats’ success — the exchange needs to brand itself more effectively if it wants to attract prospective listings, says Larry Tabb, founder and CEO of TABB Group. “The biggest issue that Bats will have in breaking into this market will be in creating a public brand — and that is not an easy thing to do,” Tabb says. “Most folks outside the trading industry have no idea what Bats is.”
Although Bats clearly wants to support IPOs, the company may have greater success going after product listings, like exchange-traded funds and warrants, Tabb says. The sheer number of exchange-traded products is surging — and their corporate issuers may not be as finicky about where those products are listed, as long as they’re traded. “From my perspective,” Tabb adds, “there is a segment of the market that Bats will be able to attack through price, where the branding issue will not be nearly as important.”
Ironically, Bats’ decision to launch its own listings business may be directly related to its announcement in May that it plans to undertake an IPO of its own and list on its primary exchange. To attract prospective investors as a public company, Bats will need to provide evidence of new growth drivers for the business beyond its current equity- and options-trading platforms. To date, Bats has been reluctant to charge for core market data, which it provides free to clients; the company only charges a fee for certain historical, value-added data products. Adding listings will allow the company to diversify its sources of revenue as well as its revenue mix.
“If the listings service is successful, it will be a highly scalable business,” says Alex Kramm, a director of U.S. equity research in New York at UBS Investment Bank. “Once you build a platform and hire people to handle the regulatory issues, every successive listing that comes on has a fairly high margin.”
Although Bats is in the midst of its quiet period and unable to comment on its strategy for attracting listings, the potential of the new business clearly intrigues industry analysts. Bats just needs to find “the sweet spot of the market” in providing inexpensive, efficient services for companies that need to list tradable fund products says Tabb. If Bats can do that, the company may yet win a hefty share of the U.S. listings market — and go a long way toward becoming a household name.
