Exciting IPO: A Stock Exchange?!

Cloud computing has been all the rage recently in IPOs, but tonight a different IPO prices: a stock exchange! BATS Global Markets (ticker: BATS) plans to sell 6.3 million shares in the $16 to $18 range.

How do exchanges make money? Several ways:

1) Trading

2) Listings

3) Market data

4) Technology platforms

BATS strength is in trading: they are the low-cost provider. They are the third-largest exchange in the U.S. (after NYSE and Nasdaq), but their share of the market is growing. Right now, they have about 11 percent of the market, behind the roughly 27 percent NYSE has, and 21 percent Nasdaq has.

But they are growing faster and taking market share.

Why? It is far cheaper to build an electronic market without a trading floor. I didn’t make any comment about whether it is better: I just said it is far cheaper.

How much cheaper? They have about 120 employees. Running an exchange on 120 employees! Think about that!

They also have a significant presence in Europe and are considering expanding into other countries (Brazil, Canada) and markets (foreign exchange, US Treasurys).

So why isn't there more excitement about this IPO? Why am I hearing that the stock could price at $16 or $17, with no big pop? Because trading volumes have been deadly. For everyone.

And the markets down for three straight days is certainly not helping.

One point: this is a partial cash-out strategy for many of the banks that were early backers of BATS: Morgan Stanley , Barclays , Deutsche Bank , Merrill, etc.

Yeah, that's right, the guys who are their customers are also their backers.

Are the NYSE and Nasdaq worried? Well, sure they are — they're losing market share. But going public will force BATS to explain their growth strategy in greater detail. Right now, they are just a low-cost provider. Greater scrutiny means more explanation of how they are going to grow in this environment.

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