BATS plans to open second U.S. options exchange in November

(Add comment, details on trade allocation model)

By Saqib Iqbal Ahmed

NEW YORK, April 16 (Reuters) - Exchange operator BATS Global Markets said on Thursday it plans to open a second options bourse in November as it tries to capture a larger share of the U.S. options market.

BATS Global Markets filed an application with the U.S. Securities and Exchange Commission to launch the new exchange, EDGX Options, an addition to its existing BATS Options platform.

Unlike BATS Options, which operates in a price-time priority market, where quotes and orders are prioritized according to price and time, the new exchange will work on a pro-rata allocation model. In the latter case, orders are prioritized according to price, and if there are two or more orders at the best price, trades are allocated proportionally according to size.

With the new exchange, BATS Global would compete with exchanges that offer the more traditional pro-rata model, including ones run by CBOE Holdings Inc (NasdaqGS: CBOE - news) and International Securities Exchange Holdings.

BATS Options handled about 9.4 percent of equity and index options contracts in March, up from 4.1 percent a year ago. The exchange had the fourth-biggest market share in March among the twelve U.S. options exchanges, according to data from OCC, formerly the Options Clearing Corp.

There are currently a dozen active U.S. options exchanges. International Securities Exchange Holdings, the New York-based unit of Deutsche Boerse AG (Xetra: 581005 - news) , in September filed for another exchange, ISE Mercury, which is yet to open.

While the new options exchange will help BATS compete in a new segment of the market, some traders have complained in the past that the large number of exchanges just adds to the complexity of the market.

"With the addition of yet another exchange, the options markets are further becoming increasingly fragmented and equate to higher costs for retail investors" due to options regulatory fees, or ORF, said Ovidio Montemayor, managing director of trading operations at TD Ameritrade.

ORF is a standard transaction fee charged by exchanges that is generally passed on to customers. (Editing by Jeffrey Benkoe and Bernadette Baum)