BATS Exchange Goes Bats Again;Pay For Orders, Now Pay For ETF Issuer Listings

MarketsMuse ETF Curators debated on the title to this story, and first suggested the headline “Has BATS Gone Bats?!” While market structure experts continue to debate the topic of pay-to-play, i.e. payment for order flow schemes, BATS Global Markets, the youngest and arguably, now one of the largest electronic exchanges in the global marketplace based on trade volume across equities, ETFs and options is proving again Donald Trump’s moto: “Controversy Sells!”

According to the firm’s announcement last night, BATS is upending the traditional fee model for companies to list on an exchange-one that had Issuers paying the Exchange for the privilege of listing the company’s securities in consideration for the respective exchange’s brand integrity and financial ecosystem integrity. Instead, BATS, in effort to capture a lead role in the Exchange-Traded Fund space is now offering to reverse the business model and will pay ETF Issuers to list their products on the BATS exchange platform.

The way in which ETF products trade has recently come under close scrutiny by market regulators and institutional investors in the wake of both disconnected NAV prices of the cash product v. the underlying constituents during volatile periods and in connection with leveraged ETF products performing in unanticipated ways v. the way in which respective marketing materials proclaim those products can be expected to perform.

As noted in today’s WSJ story by Bradley Hope and Leslie Josephs..

The Lenexa, Kan.-based exchange operator on Thursday plans to launch what it calls the BATS ETF Marketplace, which will pay ETF providers as much as $400,000 a year to list on BATS. Payments will vary depending on average daily volume.

Traditionally, ETF providers have paid between $5,000 and $55,000 a year to list on a stock exchange. BATS previously offered firms the option to list on its exchange for free. Besides the monetary incentive, the marketplace is also changing the way it rewards market makers for continuously offering to buy or sell ETFs, a move it said will help reduce volatility.

“We are redefining the relationship between ETF sponsors, investors and market makers,” CEO Chris Concannon said in an interview.

ETFs have come under greater scrutiny after they faced trading issues on Aug. 24, including prices of ETFs being far out of whack compared with the prices of the underlying holdings. Exchanges, market makers and ETF sponsor firms are in discussions about how to make wider changes to rules to help prevent similar problems from happening.

“August 24 obviously makes us go back and say: ‘Are our decisions the right ones?’ ” said William Belden, managing director of ETF strategies at Guggenheim Investments LLC.

For the full coverage from the WSJ, please click here