Capitalists of the Prairie

Speed was nice, but BATS also had to compete on cost. And from the outset BATS was able to offer highly favorable economic terms to traders who used the system because it operates in a lower-cost environment than its big-city competitors. Its office space costs less than half what similar space in New York would run. Programming talent is about 35 percent less.

Even so, location put BATS at a slight disadvantage when it sought to sign up customers. It was a challenge to convince sharp-elbowed traders that it was safe to do business with the guys with flat accents out in flyover country. Securities traders go to dozens of conferences a year, where insiders gossip, but BATS found initially that few folks had heard of them. "We went to all of them but one," says Randy Williams, a former Dow Jones reporter who is now BATS's vice president for sales and communications. While attendees all knew the NYSE and NASDAQ, they had no clue what BATS was.

To lure new customers, BATS also experimented with a tried-and-true tactic: discounting. In January 2007, BATS slashed fees and boosted the rebates for users. For a month, instead of making a penny on every trade it executed, it lost 10 cents on every trade. But many firms lured by the obvious bargain to try the system stuck around after the special ended. "We picked up 5 or 6 percentage points of market share for about $5 million," says chief operating officer Chris Isaacson, who grew up on a pig farm in Nebraska and was an All-American decathlete at Nebraska Wesleyan. Volume rose from 100 million shares per day to 265 million during the special, and continued to climb.

BATS missed its target of racking up a billion-share day by the end of 2007—but only by a few weeks. It hit that milestone on Jan. 23, 2008. And the little exchange is now a big player. Its customers include pretty much every name-brand investment bank, and it has enlisted several financial institutions as owners. Given its success, BATS has the potential to be one of those stocks traded with abandon over its wires. "It's certainly worth hundreds of millions of dollars," says Ed Ditmire, an analyst at Fox-Pitt, Kelton in New York. But Ratterman isn't interested in taking the company public. "We're building a credible, innovative market center with a 20-year time horizon," he says.

Yet BATS maintains the feel of a start-up. Instead of an executive dining room, there's carry-out barbecue for lunch. And BATS is constantly reminded of the vast gulf in size and resources separating it from its competitors. This past spring, it opened a New York sales office at 14 Wall Street, a building that stands across from the corner entrance of the New York Stock Exchange (14 Wall also houses 300 NYSE employees). From these small, unassuming digs, one can look into the window of NYSE CEO Duncan Niederauer's chandeliered office suite. Nonetheless, BATS is raising its profile. This summer, it began providing free quotes to Yahoo Finance, part of a broader effort to boost its name recognition. And this fall, it plans to take its show to Europe by opening a trading platform in London.

As the bells chime 3:30 Central Time, the New York Stock Exchange closes, and the streets of lower Manhattan briefly fill with men and women wearing the distinctive jackets of floor traders. They're off to the bars or the gym or their homes. In the BATS strip mall outside Kansas City, the Midwestern programmers aren't going anywhere. They're hunched over their screens, figuring out how to shave a few more microseconds off the trading pro-cess. "Geeks have taken over Wall Street," Isaacson says. He may yet be right.

© 2008