BATS in the Belfrey

The Bats Affair: When Machines Humiliate Their Masters

By Brian Bremner, Business Week

March 23, 2012

In the annals of business screw-ups, Bats has certainly made its mark. Bats stands for Better Alternative Trading System and the company runs two exchanges that collectively rank third in terms of U.S. share trading, behind New York Stock Exchange and Nasdaq. The Bats exchanges account for 11 percent to 12 percent of daily U.S. equity trading, according to its website. The company came of age with the expansion of high-frequency trading over the last decade and the proliferation of quant-jock-driven electronic firms that dominate the buying and selling of U.S. equities. Bats founder Dave Cummings is chairman and owner of high-frequency trading firm Tradebot Systems.

Today was supposed to be the Lenexa (Kan.)-based company’s moment in the limelight as it tried to sell about 6.3 million shares in the $16 to $18 dollar per share range. Instead, something went terribly wrong. The company’s shares somehow ended up trading for pennies per share early in the trading day on both the Bats bourse and Nasdaq, according to data reviewed in this Bloomberg story. Then tech investors and Apple (AAPL) fanboys the world over were dismayed when a single trade for 100 shares executed on the Bats market sent Apple’s shares to $542 per share, down sharply from recent levels. (The company set a new 52-week high of $609 per share on March 21.) The stock temporarily halted trading and recovered.

And, as a matter of fact, we do know what went wrong.

Bats: The Epic Fail of the Worst IPO Ever

By Dan Beucke, Business Week

March 23, 2012

Bats priced 6.3 million shares through underwriters yesterday and appeared set to begin trading about 90 minutes into the day when chaos erupted. While the company quoted its shares at $15.25 at 10:45 a.m. on its website, feeds including those sent to Bloomberg LP displayed different prices. At 11:14 a.m., Bloomberg received data showing 1.26 million shares had traded, with the most recent execution at 3.84 cents and the lowest transaction at 0.02 cent.

Compounding the confusion, a single trade for 100 shares executed on a Bats venue at 10:57 a.m. briefly sent Apple down more than 9 percent to $542.80, data compiled by Bloomberg show. Two more transactions, which sent the stock back above $598, were made before the halt. The stock stayed around that level once trading resumed five minutes later and the errant trade, along with the Bats transactions, were later canceled. Bats sent a notice about 10 minutes before the Apple trade saying it was investigating “system issues” affecting companies with ticker symbols ranging between A and BF. Apple’s is AAPL. Bats’s ticker was BATS. At 11:07 a.m., Bats’s BYX Exchange took a procedural step known as “declaring self help” against its BZX exchange, indicating that it had stopped routing orders to the market because BZX wasn’t responding to messages quickly enough.

BATS exchange withdraws IPO after stumbles

By Olivia Oran, Jonathan Spicer, Chuck Mikolajczak and Carrick Mollenkamp, Reuters

Sat Mar 24, 2012 1:37pm EDT

The debacle raised questions for regulators, investors and the underwriters, including Citigroup Inc, Morgan Stanley and Credit Suisse Group, which were listed before the IPO as major shareholders.

Since the May 2010 “flash crash” in which nearly $1 trillion in market value disappeared in minutes, the Securities and Exchange Commission under Chairman Mary Schapiro has pledged to crack down on problems in the high-speed electronic marketplace, which regulators worry has grown unstable and perhaps unfair as high-frequency trading has grown in prominence.

It is expected to draw even more scrutiny from regulators looking into the soundness of the exchange’s servers, trade-matching engines and computer codes, and it could land BATS in legal trouble for withdrawing its IPO after trades were executed in the public marketplace, according to experts.

“It’s just another black eye for the fragmented equity structure,” said Joe Saluzzi, co-head of equity trading at Themis Trading in Chatham, New Jersey, and a frequent critic of U.S. equities market structure. “Every day we see things like flash crashes and now IPOs that can’t get off the ground.”

But don’t worry, our captive fearless SEC facilitators regulators are on the case and the Obama/Holder Justice Department will make sure that everyone skates any irregularities are appropriately corrected.

Or not.

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