Bats-Direct Edge Combination About Innovation

Terry Flanagan

The merger of Bats Global Markets and Direct Edge creates the second-largest U.S. exchange, and equally important, will foster a culture of innovation, Direct Edge CEO William O’Brien told Markets Media.

“This transaction is all about the customer,” he said. “Each company brings to the table unique assets. Direct Edge has been focused on product innovation and customer alignment, while Bats has world-class technology and electronic market making. This will allow a broader, more diverse set of products.”

An example is market data, for which customers traditionally have had to pay exchanges in addition to other services. Direct Edge has introduced its quote attribution functionality, which include the Edge Attribution Incentive Program, designed to reward members for providing Direct Edge exchanges with valuable data and increased transparency for investors.

Starting in February 2013, EDGA and EDGX have each set aside 25% of the monthly revenue generated in connection with fees received from EdgeBook Attributed. From this revenue allotment, the exchanges provide a payment to eligible members who qualified for the Attributed Order Incentive Program based on the percentage of executed share volume from their Attributable Orders entered into the Exchange’s System.

The attribution functionality is available to any member who wishes to increase their transparency on the orders they send to EDGA and/or EDGX. This functionality also enhances the Direct Edge Market Maker Program, allowing market makers to identify themselves as willing to buy and sell securities on the exchanges to facilitate making continuous two-sided markets.

With Direct Edge Brazil, Direct Edge intends to adapt its high-performance technology and customer service to the unique needs of the Brazilian market and trading community.

Earlier this month, Direct Edge responded to Brazil’s Comissão de Valores Mobiliários’s (CVM) request for comments, suggestions and opinions regarding the introduction of competition between trading platforms in Brazil. The CVM’s request for consultation instructed respondents to specifically address the challenges of ensuring the integrity of best execution, market data distribution and self-regulation in a market with multiple exchange participants.

“We believe that Brazil already has one of the world’s premier capital markets, and are excited by the prospect of adding additional value to brokers and investors as a new exchange entrant,” O’Brien said. “While introducing competition requires certain regulatory transitions to ensure continued efficiency and investor protection, we believe that CVM is taking a thoughtful and deliberative approach and is focused on the relevant subject matter.”

The Nasdaq exchange glitch and similar episodes have led to a heightened focus by regulators on the robustness and resiliency of exchange infrastructure.

“Direct Edge has long been an advocate of SEC oversight of exchange and critical infrastructure technology,” said O’Brien. “The SEC is already committed to that with Regulation SCI, and we would expect to see that accelerate under Chairman White.”

Direct Edge was the first U.S. stock exchange to announce and implement a program intended to impose economic penalties on trading firms that had excessively high message-to-trade ratios.

The Message Efficiency Incentive Program prompts trading firms to examine their behavior and suffer the consequences if they choose to flood our market with orders that seldom or rarely result in trades. This gives members the freedom to use technology as they see fit but at the same time the responsibility to use this technology efficiently.

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