The large BATS sign behind home plate at Kauffman Stadium has nothing to do with baseball. It's about Wall Street and how a local enterprise rewrote the business of trading stocks in America.
The sign belongs to BATS Global Markets, a six-year-old Lenexa company that runs the nation's third-busiest stock exchange.
It operates a computerized market where brokers carry out customers' orders to buy and sell the stocks of hundreds of companies, just as they do on the New York Stock Exchange, the Nasdaq Stock Market and smaller markets.
BATS' short history has been a remarkable acceleration from zero to 60 that culminated May 13 with the company's plan to put its own shares on the market with an initial public offering.
Not bad for a company that analysts had left for dead a year into its unlikely journey.
Instead, BATS broke the grip of the New York Stock Exchange and the Nasdaq markets by waging a price war.
Once the dust cleared, the BATS Exchange was handling about 10 percent of all trades in U.S. stocks, and the big exchanges ended up making less money on the trading volumes they had left.
"It's incredible that they have 10 percent. That in itself is a huge accomplishment," said Sang Lee, managing partner at the Boston consulting firm Aite Group.
Though incredible, BATS' share of U.S. stock trading won't be enough to sustain the business.
BATS Global Markets already has grabbed a chunk of trading volume in Europe's stock markets and is exploring its potential in Brazil. BATS also has stepped into the still highly lucrative business of trading options.
The company's future, analysts agree, depends on how well it uses the money it raises to grow beyond the U.S. stock market.
And as BATS makes its sales pitch to potential investors, Kansas City is getting an inside look at the area's latest entrepreneurial success story.
The big idea
The entrepreneur is Dave Cummings, a self-described computer geek from Park Hill High School who began to trade commodities and then stocks.
He launched BATS in 2005 with a cadre of employees from his other business, Tradebot Systems. Tradebot buys and sells stocks using complex computer programs to send rapid-fire orders into exchanges and other equity trading centers.
Neither Cummings nor anyone else at BATS would talk for this article while it prepares for the initial public offering.
Documents that BATS filed with the Securities and Exchange Commission for the planned stock offering give the first detailed look at its business.
They show a profitable operation that is far smaller than its well-known rivals.
The company employs 114, including 79 locally and 29 in London for its operations there. Technology teams in Lenexa design, update and operate the electronic exchange, though the computer center is in New Jersey, near where the systems of others are based. (In the world of electronic trading, microseconds count, and it would take too long for a trade order to travel electronically to Kansas City and back.)
BATS' $99 million in revenue last year amounted to 6.5 percent of the revenue at NYSE Euronext, owner of the New York Stock Exchange, and 4 percent of the revenue at Nasdaq OMX Group Inc., which owns the Nasdaq market.
BATS earned $19.8 million last year. Its profit margin was slightly lower, but the company's total earnings were roughly proportionate to its size when compared with the big exchanges. The matchups certainly didn't start that way.
A better alternative
Cummings hatched his plan for a better alternative trading system (the origin of BATS) at a time when other upstart equity markets had begun to disappear. He watched firms called Brut, Strike, Island, Redbook and Archipelago grab trading volumes, then merge with the two big exchanges.
"It looked as if the U.S. equity market, after six or seven years of intense competition, would look very much like a duopoly," Lee said.
Cummings' big idea was to get not only his firm Tradebot but also other big traders — the broker-dealer firms that make up Wall Street — to buy into BATS, both as customers and as owners.
An equity trading center needs traders, a mix of buyers and sellers ready to deal. The more traders it attracts, the more others will follow.
BATS first wooed business with its fees, not by charging less but by paying more.
Broker-dealer firms pay fees to execute trades at exchanges when they snap up others' offers to sell stock or bids to buy shares in that market. They earn rebates when they post offers and bids on the market's trading book, which will attract others.
Early on, Cummings ratcheted up the rebates at BATS until they were bigger than the fees. Broker-dealers made money when they executed trades at BATS.
Of course, intentionally losing money is no way to run a business. But it was an effective way to get BATS going.
"When they had their inverse pricing, that was a play to get market share, and they got that market share," said Michael Wong, capital markets analyst at Morningstar.
At the same time, Cummings wooed the broker-dealers as partners. BATS is now largely owned by the broker-dealer community, including Bank of America's Merrill Lynch, Citigroup, Credit Suisse , J.P. Morgan and Morgan Stanley.
That's how the New York Stock Exchange and Nasdaq had been for decades — owned by the broker-dealer community.
By the time BATS came along, however, both already had taken the path BATS is now taking. They held initial public offerings and became investor-owned businesses.