Mexican slang for "man"... there is some kind of respect implicit on this word to the guy referred as vato. Vato is a guy who means business.
The instance Bato
instead of Vato
should be more appropiate as it sounds on the streets. But grammatically, both words are correct because this word hasn't been ruled by any Language academy so far.
Vato is not the same as güey. Güey does not implies respect. Güey is more alike to be pejorative or familiar depending the way it is applied.