Bats to Launch Pro Rata Options Exchange

Terry Flanagan

Bats Global Markets, in launching a second options exchange, is seeking to make inroads into the pro rata segment of the U.S. options industry, which still commands about two-thirds of total volume despite the gains made by maker-taker exchanges, according to Bryan Harkins, executive vice president and head of U.S. markets at Bats.

“This represents a natural extension of Bats’ growth in the options industry,” Harkins told Markets Media. “To date, we’ve been running a maker-taker price-time exchange. Over the last year in particular, we’ve exploded to the point where we’re surpassing some of the legacy players.”

The pro rata exchange, EDGX Options, is designed to complement the existing BATS Options market, which will be called BZX Options. Launched in February 2010, BZX Options is a pure price-time priority market with a maker-taker pricing model that trades multiply-listed equity options available for trading in the U.S. BZX Options market share was 9.4% in March, more than doubling from 4.1% a year ago, the company said in a release.

Harkins noted that while maker-taker has grown as a percentage of trading volume, it’s uncertain whether it will overtake pro rata. “There’s a variety of reasons that explain why the pie is broken out as it is,” he said. “It’s just simply a different market structure than what you see in equity exchanges.”

For example, the options industry does not have an off-exchange trade reporting facility, as exists for equities, which provides a mechanism for reporting of Nasdaq-listed or other exchange-listed securities that get executed otherwise than an exchange. “Market makers bring flow on exchange to print, and [pro rata] is still a very large percentage of the market that any exchange as it seeks to complete needs to be in.”

Bats earlier this month migrated the technology platform for the BZX Options exchange to the Equinix NY5 data center. EDGX Options will also be located in the NY5 data center with all the other BATS U.S. markets, minimizing the technology effort required for existing members to begin trading on EDGX Options.

“Technology has always been a strength of ours here at Bats,” Harkins said. “The fact that we’re able to run four equities exchanges and now two options exchanges, on generally a common technology platform, allows us to realize great economies of scale that we pour back into industry cost savings and price leadership.”

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