Posted on Sun, Nov. 08, 2009

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Lenexa company tracks stock market with its own new index

BY MARK DAVIS

Kansas City Star

A Lenexa company has a new answer to the question "How'd the market do today?"

Investors, however, might not think they need a new answer to a question addressed by the Dow Jones industrial average, the Standard & Poor's 500, the Nasdaq composite, the Russell 2000 and myriad other stock indexes.

Still, Lenexa-based Bats Exchange launched its Bats 1000 stock index in July as its own daily read on Wall Street's ups and downs.

"It's an awareness issue of the fact that Bats is an exchange, that we are in this space and that we have an opinion about how the markets are doing," said Bats CEO Joe Ratterman.

The Bats Exchange is an industry upstart that has grabbed about 11 percent of the daily trading volume in U.S. stocks listed on the New York Stock Exchange and Nasdaq.

The Bats stock index seeks a familiar read on Wall Street's trend but from a different direction. One key difference in indexes is the list of companies each follows.

The popular Dow Jones tracks the stocks of only 30 large industrial companies that are deemed to be blue-chip players in their key industries. The Russell 2000 tracks that many small- to midsize companies' stocks.

Ratterman likens his Bats 1000 to a broader market sample than the S&P 500, with double the field.

"The one I personally most identify with when I'm trying to figure out how the market did today is the S&P 500, and I thought still that's maybe not quite representative enough," he said.

The Bats index shakes things up in other ways, such as assigning companies to its own version of the 10 sectors of the economy.

It divides companies that do business with consumers, for example, between consumer goods and consumer services. Traditionally, analysts look at these stocks as either consumer cyclical stocks that rise and fall with the economy, such as electronics retailer Best Buy, and consumer staples companies that don't, such as diapers and toothpaste maker Procter & Gamble.

Each of Bats' 10 sectors contains stocks of 100 companies, building out the Bats 1000 index.

Here's one more key difference: On July 1, when Bats officially started calculating the index, it gave each of the 10 sectors an equal weight in deciding the value of the index.

Sandip Bhagat wondered why.

Bhagat is a principal at the Vanguard Group, a leader among stock index mutual funds. Vanguard prefers indexes that weight companies' importance in an index to the market value of all its shares. Let the market decide the relative importance of each, the reasoning goes.

For example, Bhagat said the value of technology stocks currently accounts for nearly 17 percent of the market. Bats, on the other hand, set its technology sector at 10 percent of its index, even after including telecommunications stocks that traditionally get their own sector.

"This decision to be 7 percent below the market weight in technology... what is driving that decision?" Bhagat said.

Ratterman said that by giving each sector equal weight he hopes to devise a "more rounded" answer to the question of how the market does each day.

Using companies' total market values can give larger companies too much influence. That's exactly the situation many cited when a few technology stocks helped drive the Nasdaq to record levels in 1999 — until the bubble burst.

So far, the Bats 1000 tracks fairly closely with both the Dow and S&P 500.

But few are watching at this point, and Ratterman wants to see the index run for a couple of years before pushing for mutual funds or exchange-traded funds based on the Bats 1000.