It's been one year since I wrote about the regional exchanges competing with the Nasdaq and NYSE. The competition is heating up, and boy, oh boy, I am seeing a lot of gusto from the little guys. The regionals have partnered with some big names, but two ECN networks in particular aren't going anywhere without a fight. The key points of last year's article were about being nimble, selective and patient. The two companies that have done this are Knight's Direct Edge and BATS Trading. I have to say that I am surprised they have gained as much traction as they have in such a short period of time. But with the hard work I have witnessed first-hand, I am not shocked.
Call him outspoken, aggressive or just plain crazy, Kansas City, Mo.-based BATS Trading CEO Dave Cummings has taken the proverbial bull by the horns and stepped toe to toe with the Nasdaq and NYSE. His weekly mass e-mails have become commonplace on traders' desks, informing them on what BATS is doing and providing facts on why BATS and other alternative pools of liquidity are important to the market structure. The BATS team is aggressively making sure it provides the service to its customers, but at the same time not being too pushy about it. BATS has the backing of Lehman, Morgan Stanley, CSFB and Lime Brokerage, which is akin to having your big brothers with you when you are in a showdown with the schoolyard bully.
Direct Edge ECN, a wholly owned subsidiary of Knight, is not as outspoken but just as aggressive. It is carving out a niche with exotic order types and, like BATS, it offers a very cheap rate to remove liquidity from the market and a high rebate to add liquidity. Getting an e-mail from a saleswoman, Lauren Mosolino, at 11 p.m. at night, for example, shows that the firm is working long and hard hours to gain critical mass. Having Knight's big name behind it gives Direct Edge the support and infrastructure it needs to get to the next level.
Both ECNs have teamed with the National Stock Exchange, giving them the ability to print their trades away from Nasdaq. Both also launched a special "inverted" price campaign this past January in an attempt to gain more market share. It reminded me of the Carvel ice cream "Buy one, get one free" Wednesday specials that I used to take advantage of as a kid. So far it has worked pretty well.
Traders at Legend Securities — a broker-dealer that uses my company's trading platform, HydraTrade — have raved about the price fulfillment, cost and customer service of both Direct Edge and BATS. So now that they have the trading community's attention, what's next? Their own exchange?
I think both companies will continue on the same path that has gotten them this far, using their ability to be nimble to their advantage. Being nimble and patient is still the key to this competition for market share. The price to execute is the next battle. Will Nasdaq and the NYSE budge? Will they have no choice? The soap opera continues.