Six years ago, as many Wall Street players fretted about fewer trading options and reduced competition after Nasdaq and the New York Stock Exchange each swallowed Island Instinet and Archipelago, BATS Global Markets founder Dave Cummings saw an opportunity.
In an interview with Advanced Trading, Cummings - owner and chairman of automated trading firm Tradebot Systems Inc. - explains what led him to launch BATS, the reason for its early success, and why alternative venues such as Direct Edge are good for the global exchange operating industry.
Why was there a need for an alternative trading system like BATS?
Dave Cummings, Tradebot Well Nasdaq and the New York Stock Exchange bought out the first generation of ECNs. Island Instinet, Brut, and Archipelago all got acquired and there just wasn't the level of competition that we needed.
What fueled BATS' success?
Cummings: I come from a trading business, Tradebot. We built the kind of market that the customers wanted to use. We came at it from a customer's perspective. The technology was phenomenal, the best in the world. The pricing was unbelievably aggressive and low.
We made sure the technology was great, we made sure the price was ultra low, and we made sure that the customer service was acceptable. We made sure that it could handle a massive volume without falling over. We built it and then we explained to the industry that you need this if you want to have aggressive price competition and better products from exchanges.
When did you realize BATS would be a force in the global exchange operating business?
Cummings: The idea was pretty obvious. Island and Archipelago had been successful and then they got bought. And the big companies were in the process of raising prices and then running it into the ground. So the initial notion was just obvious. We just need to replace Island. I think then after we had it up and running six months or year, then there was a notion that we could go even further than we did. But there was just a gaping hole to be played because the industry over-consolidated. So we built a product to just replace Island and Archipelago.
How did the rise of BATS and Direct Edge improve the market?
Cummings: Competition makes everybody work harder. The whole justification for the original mergers was to eliminate competition so they could raise prices. As a customer we don't like that. So we made a competitive playing field by restoring competition. We heard that from a lot of the original people from Island and Archipelago. After they got bought they quit and went onto other things because it wasn't fun working for these behemoths. We knew those guys well because we were their customers. So we tried to build a product around their experience.
As the Senior Editor of Advanced Trading, Justin Grant plays a key role in steering the magazine's coverage of the latest issues affecting the buy-side trading community. Since joining Advanced Trading in 2010, Grant's news analysis has touched on everything from the latest ... View Full Bio