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Nasdaq and Bats Square off on Market-Close Orders

The status quo never likes change, nor the upstarts that attempt to initiate innovation. When innovation and change occur, the entrenched typically lose prominence, certainly preeminence, and often times money. Disagreement and conflict ensue, but the strongest survive and seem to stay in power. It happens across the full spectrum of businesses, and it’s happening again now with Nasdaq, Inc. and Bats Global Markets.

Most are familiar with Nasdaq, the world’s first electronic stock market. It was founded in 1971 by the National Association of Securities Dealers, the financial self-regulatory agency of its era. At first, Nasdaq was only a quotation system, but, eventually, it effectuated the majority of trades that previously had been executed through the over-the-counter system where trades between parties occurred without exchange supervision. Over time, Nasdaq helped lower the bid-ask spread in stocks and became more of a true stock exchange by adding trade and volume reporting and automated trading systems. It was the first stock exchange to start online trading and touted itself as “the stock market for the next hundred years“. A hundred year superiority was not in the cards, but Nasdaq did attract new growth companies such as Microsoft, Oracle, Apple, and Cisco, and it helped modernize the IPO process. In 1992, Nasdaq merged with the London Stock Exchange and formed the first globally linked markets. In 2000, it was spun off and went public as an independent exchange and was licensed as a national securities exchange in 2006, about the time its claim of a one-hundred year reign was being challenged.

Bats Global Markets was founded in June 2005 by a computer programmer, Dave Cummings, after watching the consolidation and monopolization of the exchanges by the NYSE and Nasdaq. Cummings publicized the Bats service by sending solicitation emails to companies highlighting the benefits of trading on platforms other than the NYSE or Nasdaq, which had eliminated competition and raised prices for their services. The Bats system charged less, which helped attract other brokerage firms and hedge funds to engage with the upstart trading system. In 2008, Bats entered the European equities markets to compete against global incumbent securities exchanges. Bats tried to go public in 2012 but withdrew due to a calamitous trading system glitch and admitted what it called a system issue. In March of 2017, Bats was acquired by CBOE Holdings, the owner of the Chicago Board Options Exchange, for $3.2 billion. Established in 1973, the CBOE is the largest options exchange in the U.S., and the acquisition of Bats put the CBOE in direct competition with Nasdaq and the NYSE.

The latest contest between these trading behemoths centers on Bats wanting to offer brokers a type of order that would give them the same closing prices derived from the closing auctions on Nasdaq and the New York Stock Exchange for stocks listed on those exchanges, but with lower execution fees. Nasdaq said in a letter to the U.S. Securities and Exchange Commission that such a move by Bats, which currently only lists ETFs and the stock of its parent company, CBOE Holdings, would fragment the market close and result in less accurate pricing. NYSE has also blasted the Bats proposal, saying that diverting trades away from closing auctions would add to volatility and distort prices. (

This is a turf war among giants and one can only believe that whoever wins and becomes dominant will adjust prices to their own benefit. Meet the new boss, same as the old boss.

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