BATS - a Better Alternative Trading System

I was just reading about BATS today. From their web site (www.batstrading.com):

BATS Trading is an Electronic Communication Network (ECN). We offer direct connectivity to U.S. broker-dealers. BATS incorporated in June 2005 in response to rapid consolidation in the ECN space. We believe competition drives innovation, and subscribers should have a choice between multiple competing electronic markets.

I'm curious if anybody has trading through BATS or knows anything about this system?

BATS is Dave Cumming's spin-off from his company Tradebot.

I have not used BATS but I have read all about Dave Cummings. He created Tradebot and makes between $30k and $150k a day trading a type of lightening fast arbitrage system where he picks up discrepencies in stock prices on the exchanges.

He had to move his computers to the exchange's buildings to get an extra split second to make his systems work because there difference between 1/1000 of a second on his system makes a big difference... i.e. win or lose.

This means that the speed of light from a few miles away is not fast enough for him to make money using this system and that it has to be instantaneous.

But I digress, you were asking about BATS and not Tradebot.

I think one way they use this technology is to make money from the liquidity rebates.

How does that work pt_emini? I am not familiar with liquidity rebates.

The exchange pays you a rebate for adding liquidity to the book. Some fractional amount of money per share. For example, the Nasdaq and Amex exchanges pay you 0.0024 per share when you add liquidity to their limit order book.

So if you had zero commission costs then a break-even trade would result in a profit?

yeah i think that's the general idea. For example, if you trade 10,000 shares an hour, the rebates add up over time. If you can average a bit more profit than the spread, let's say 2x the spread, then your talking real money. We used to do that in the ES some years back when the liquidity was very thin. 1/2 tick covered your cost and 2+ ticks were profit. With the liquidity rebate, they are actually paying you a fraction of a tick. (Love to see the day the CME does that!!!)

If so, then the the BATS model is likely based on trade size and speed of execution, in which case it would have to be fully automated to work correctly. It's a cool idea, I would like to go up there and see their operation in person.

I don't think that it's the BATS model that does that but the Tradebot model. BATS is an electronic exchange, an ECN. Tradebot is the one (from my understanding) that has the fully automated execution system that needs to be near to the exchange.

correct, and I assumed that point/difference in my comment.

What I had assumed with my comment is that BATS was designed to be used by the Tradebot model (size and execution speed). Saying it another way, to use BATS as it's designers intended, you need to be following the Tradebot model.

Sorry for the confusion in my previous posting, and thank you for clarifying it.

That makes sense. If you have an automated system that works well on an electronic exchange and then you decide to set up your own electronic exchange it would be logical to set up an exchange (BATS in this case) that would be best traded by that/those type(s) of systems.