BATS to Launch Second U.S. Options Exchange (with Lofchie Comment)

BATS Global Markets ("BATS") filed proposed rules with the SEC to launch the new options exchange EDGX Options. Pending SEC approval, BATS plans to launch EDGX Options in November 2015.

EDGX Options will use a pro rata order-matching model, which typically allocates an incoming market order to a group of limit orders at a given price level in proportion to the amount of volume the order represents.

Currently, BATS operates BATS Options (now called "BZX Options"), which is an options exchange that uses a pure price-time priority order-matching model instead of the pro rata order matching model described above. BATS intends EDGX Options to complement BZX Options by allowing BATS to compete for order flow that does not trade on price-time markets.

BATS plans to announce details regarding the fee schedule, launch date, rollout, technical specifications and testing schedule for EDGX Options at a later date.

Lofchie Comment: The new BATS exchange works on a model that favors "size" as opposed to chronology. This shift in priorities results in a model wherein a larger order displaces a smaller order (with time priority) at the same price. For example, let's say there is an order for 100 shares at X price, and a subsequent order for 900 shares at the same price. Then there is a bid for 100 shares at X price. In a time priority system, the small order will take the whole bid. In a volume allocation system, the big order will get 90% of the bid; i.e., being big is favored over being fast. A philosophical question is raised by BATS' starting a second exchange with a different order-matching model: to what extent should trading markets be "one size fits all"? If a one-size-fits-all market does not work, will that undermine the philosophy of Regulation NMS, which favors first over big?

See: BATS Press Release; Rule Filing.