Bats' Close

Yesterday's SEC decision to approve the Bats market on close order won't make NYSE and Nasdaq happy. They’ve spent the time, effort and energy to craft an auction mechanism for orderly stock trading at the close of the trading day. While its true these closing prices are not always perfect, through extensive industry dialogue real effort has gone in to the creation of their respective auction products; order submission cutoff rules, imbalance offset order acceptance, closing imbalance information publishing and more. Its all got to work and at scale.

CBOE/Bats comes along and says that exchange users can now benefit from the auction’s price discovery process, though at a fraction of the cost by first trying to get a fill at Bats. If Bats receives orders that offset, they'll print a trade for only the offsetting share quantity using the primary exchange closing price on its own trades. Really they’ll be just matched crosses, what is not paired off at Bats is rejected back to sender. There are important timing aspects to all of this.

So how will this work from broker dealer's perspective? The closing algo logic will aim for “send to BATS, if filled great (cost of trading reduced), if rejected back from Bats send to primary close lo be filled at regular trading fee.” Again, timing will be important.

End clients are now more than ever involved with venue selection for broker routing. This one is a little different in that the price will be the same no matter where filled, the exchange access fee will just be lighter on Bats. There will be really no toxic price action to consider after the fill as we're talking about the close here. Institutional clients will say to brokers ‘as long as I’m not dealing with any trading snafu around this workflow, I don’t care where you go with my MOC order’. .. and thus street exchange access fees payable will be reduced. Whether exchange fees are being passed through to end clients would be another matter for consideration.

While there are naturally other factors to this story when looked at through the lenses of exchange intellectual property and industry plumbing/infrastructure as ever its always about price (cost).. and risk. Sifma argued that it wants this. What it wants is a cheaper close *with no glitches*.

NYSE and Nasdaq argued to the SEC the part about market complexity has gone too far, and that confidence in our markets has suffered. Trading technology glitches happen, and they always will. The happy path from here (for those not NYSE or Nasdaq) is that this is a nothing, it just gets quietly rolled out and used. The SEC has decided, and now it will be up to CBOE/Bats and the broker community to make this go smoothly. No pine tar.