Bats Global Markets CEO Chris Concannon has been at the forefront of securities product and trading innovation from the start of his career.
During law school, Mr. Concannon served as a legislative analyst at the American Stock Exchange while the first U.S. exchange-traded funds were launched. And ever since, he has held positions integral to driving the modernization of securities trading and exchanges, even as passively managed investing and exchange-traded products helped to transform the modern securities marketplace.
Following roles at the Securities and Exchange Commission, Nasdaq Inc. and electronic trading firm Virtu Financial LLC, Mr. Concannon is now slated to become president and chief operating officer of CBOE Holdings Inc. when its proposed deal to buy Bats closes in the first half of 2017. CBOE Holdings CEO Edward T. Tilly will remain CEO of the combined company.
Bats, based in Lenexa, Kan., will bring its trading technology and market-making relationships to CBOE as well as expand CBOE's footprint in the $2.4 trillion ETF ecosystem. Though Bats currently lists just 5% of the entire exchange-traded product market, many of the most active ETFs routinely trade millions of shares on the four U.S. equities exchanges operated by Bats. According to research from XTF Inc., the Bats exchanges can account for 20% to 25% of the $73 billion in daily trading volume by dollars, rivaling NYSE Arca, which dominates the ETF listing market.
Pensions & Investments spoke recently with Mr. Concannon, who is based in New York, about the acquisition and the role of ETFs. The following has been edited for space and clarity.
What stands out for you in the proposed transaction?
CBOE was bold enough to announce that Bats Chief Information Officer Chris Isaacson would be taking over technology in the combined company. This suggests a high level of commitment from Mr. Tilly and CBOE to making this combination work, which is very different than prior transactions I have seen in this space.
How does Bats' current position in ETFs coordinate with the acquisition by CBOE?
Bats is a market that makes prices, because we are a low-cost, technology-focused exchange. And the ETF business that we have was a component in the acquisition. But CBOE is no stranger to ETFs. In fact, 50% of U.S. options volume is options on ETFs, by far the fastest growing segment of the industry. So marrying one of the largest operators in ETFs and an options exchange that is sizeable in options on ETFs is an important combination.
There's greater opportunity for order types that allow for the purchase of the option and the underlying in the same microsecond. But I also get excited about creating new options or futures-based products. For example, VIX futures were not very active until related exchange-traded products launched, fundamentally changing the market for VIX futures.
Bats can already trade any listed product. Why do ETF listings matter?
The listing exchange influences the ETF issuer's relationship to market makers and, thereby, spreads that directly impact the performance of the product. Working with market makers — through economics and technology — can create tighter spreads that would otherwise come out as commission dollars paid by investors. Elsewhere, exchange opening and closing auctions matter for setting price. We want to be the No. 1 exchange measured by tightness of ETF spreads and the top provider for ETF prices globally.
What about the recent expense ratio reductions by several ETF issuers?
Exchanges and issuers are constantly adjusting fees to benefit their customers by either reducing fees paid on an exchange or fees extracted from an investment portfolio. BlackRock (Inc.), Vanguard (Group Inc.), and Fidelity (Investments) continue to play in to this by growing massive businesses and continually lowering fees. Just as we build scale in our merger with CBOE so we can reduce fees in the future, I see that playing out in the investment adviser and ETF market.
How much attention do you pay to emerging fund structures and products?
Way too much! I look at our market, where innovation centers on market-making and forming price, and I think that the next wave will be in portfolio investing. Your parents' mutual funds are much less sophisticated than the structures and products we have now. Robo advisers are just the beginning. There's a different conversion happening at the point of sale. Brokers and advisers have changed their entire business models and the (Department of Labor's fiduciary rule) has changed that further. While it currently applies only to retirement accounts, it's causing everybody to roll into an advisory fee-based structure.
What do you see as the greatest opportunity in the ETF market?
There's a massive capital shift, not just in the U.S. but around the world, to passive investing through ETFs. I think we'll see portfolios being delivered directly to investors through an exchange mechanism that are fully transparent, highly liquid and price every day. The exchange business can help foster innovation through our market makers, products and services and our transaction with CBOE accelerates our capacity to do more.