BATS Warns Against Blanket Regulation For Off-Exchange Trade

The top executive of BATS Exchange said Monday that off-exchange electronic trading platforms should bear more regulatory responsibility as they gather a greater share of U.S. stock trading activity.

However, alternative trading systems like so-called dark pools remain "separate and unique" from exchanges like BATS, and regulators ought to resist uniformly applying tougher requirements across all such venues, according to BATS Chief Executive Joe Ratterman.

"In our view, an ATS with 0.05% market share should not have the same regulatory weight as one that has 3% market share," Ratterman wrote Monday in a letter to customers.

"An ATS that has, say 5% market share, is starting to look a lot like a large public market and perhaps should begin to carry the incremental weight of its peer registered exchanges," wrote Ratterman, suggesting a "sliding scale" of responsibilities based around trading volume.

Alternative trading systems include a host of different trading venues, including electronic communication networks, crossing networks and dark pools. The platforms facilitate stock trading, but operate under a looser set of rules than regulated exchanges.

Such platforms are prized by institutional investors seeking to move large blocks of shares without alerting the public markets, as well as high-speed traders looking to rapidly transact business across a range of venues.

Alternative trading systems have expanded their slice of the U.S. market in recent years, cutting into the business of stock exchanges run by NYSE Euronext (NYX) and Nasdaq OMX Group Inc. (NDAQ).

A February report from Rosenblatt Securities estimated 17 major non-displayed U.S. trading venues accounted for 10.3% of stock trading volume in January, a new record as broad market volatility continued to decline from the height of the financial crisis.

The SEC has proposed new rules that would require alternative trading systems to display orders if that platform's trading activity in a particular stock exceeds 0.25% of daily volume, as opposed to the current 5%, as well as new requirements around disclosure and access.

Ratterman wrote Monday that "regulatory obligations, public quoting requirements and fair access provisions might be better implemented as a sliding scale based on the relative success (i.e. market share) each platform achieves."

"This will ensure that new competition can continue to enter the arena and challenge those ahead of them, spurring continuous innovation and efficiency for our industry," he wrote.

Kansas City, Mo.-based BATS represents an ATS that evolved into an exchange, a path now being pursued by rival Direct Edge, which on Friday secured approval from U.S. regulators to convert its two electronic trading platforms into exchanges in the coming months. Direct Edge's total market share came in at 9.6% in February.

While most so-called dark pool venues constitute less than 1% of overall U.S. stock trading activity, a few have developed significant momentum.

The biggest is Credit Suisse's (CS) Crossfinder platform, with 2.2% of consolidated U.S. equity volume in February, according to the Rosenblatt analysis. Goldman Sachs Group's (GS) Sigma X accounted for about 1.6% of trading last month, while Knight Capital Group's (NITE) Knight Link had 1.4%.

BATS' Ratterman noted that few, if any, of these venues will pursue regulated exchange status the way BATS and Direct Edge have. In these cases, he wrote, "we shouldn't put too much 'weight' on ATS entities, but should attempt to find a balance of responsibility that correlates to the relative size of the ATS."

-By Jacob Bunge, Dow Jones Newswires; (312) 750 4117; jacob.bunge@dowjones.com

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