Bats blaming code in IPO stirs concern on market complexity

March 26 (Bloomberg) -- The software error that derailed the initial public offering of Bats Global Markets Inc., where 11% of all U.S. stock trading occurs, rattled investors concerned about the growing complexity of financial markets.

Joe Ratterman, the chief executive officer, canceled the March 23 IPO after a computer malfunction kept Bats from trading on its own platform and forced a halt in Apple Inc., the world’s biggest company by market value. Transactions in Apple and trades for more than 1 million Bats shares were later canceled.

While engineers at the third-largest U.S. exchange owner reacted in seconds to restore order, the failed debut highlighted concerns about electronic exchanges at a time when regulation of financial markets is increasing after the worst crisis since the Great Depression. New venues have helped cut the proportion of shares changing hands on the New York Stock Exchange and Nasdaq Stock Market in the corporations they list to less than 26% from at least 80% in 1997.

“The electronic market operates very efficiently and it can accommodate many more trades than a human-only market, but I think what happened Friday shows that you still need boots on the ground,” Walter “Bucky” Hellwig, who helps manage $17 billion at BB&T Wealth Management in Birmingham, Alabama, said in a phone interview yesterday. “The fact that it was corrected quickly helped. But the fact that it happened at all makes people just stand back.”

No Payday

Ratterman, 45, is facing the biggest crisis of his career after the IPO was pulled, denying a payday for Wall Street firms such as Bank of America Corp. and Deutsche Bank AG that own stakes in Lenexa, Kansas-based Bats, which was founded by a high-frequency trader in 2005. The IPO was managed by three of Bats’s owners, Morgan Stanley, Citigroup Inc. and Credit Suisse Group AG.

The rapid drop to 0.02 cent from $16 in Bats just as it started changing hands on March 23 reminded investors of the so- called “flash crash” in May 2010, a much larger breakdown.

U.S. markets have yet to recover from the subprime mortgage crisis and financial meltdown that began in 2007. The Standard & Poor’s 500 Index, which has more than doubled from its bottom three years ago, remains 12% below its peak. Regulators are still putting in place checks on Wall Street, including the so-called Volcker rule designed to keep banks from taking risks with depositors’ money.

Chaos Erupts

Bats priced 6.3 million shares on March 22 and was ready to begin trading a day later when one of its computers malfunctioned, triggering events that ended with the IPO’s cancellation. While the company reported its opening transaction for $15.25 a share at 10:45 a.m. New York time on its website, feeds including those sent to Bloomberg LP displayed different prices as a result of the error related to the auction process. By 11:14 a.m., more than 1 million shares had traded, according to Bats.

Compounding the confusion, a single transaction for 100 shares executed on a Bats venue briefly sent Apple, which has a market value of $555.7 billion, down more than 9%, setting off a circuit breaker that halted the stock everywhere in the country for five minutes. The shares rebounded and the errant trade at 10:57 a.m., along with all transactions in Bats shares, were later voided.

“There are going to be isolated events at the different market centers over time,” Ratterman said in a March 24 interview. “We’ve had historically very few instances where our systems have gone down, but they have gone down in different ways in the past like every other venue. I don’t think this is anything new as much as it was under a bright spotlight.”

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