Bats blaming code in IPO stirs concern on market complexity

Market Availability

BZX Exchange, its main market, was accessible to users 99.94% of the time last year, according to a regulatory filing. BYX Exchange, its second market, was available 99.998% of the time, the company said. The main market processed an average of about 29,000 order messages per second.

The U.S. Securities and Exchange Commission is in discussions with Bats to determine the cause of the incident and review the steps the company is taking to remedy the issues, according to SEC spokesman John Nester. To Andrew Ross, a partner at New York-based proprietary trader First New York Securities LLC, technical problems that affect trading are becoming routine.

‘Almost Ignored It’

“Situations like this happen so frequently that I almost ignored it on Friday, which is a testament to the issue of these technological failures,” Ross said in a phone interview yesterday. “People who trade every day realize that these kinds of errors happen. But it looks awful for Bats, given that they’re an exchange that claims to have technological prowess as a platform for high-frequency trading.”

Daniel Hawke, an official with the SEC’s enforcement division, said last month that the agency is examining trading practices that gained dominance in the past decade amid the shift to automation. Regulators are weighing the benefits of electronic markets and exchange competition, which sped up executions and cut commissions for individuals, against technology concerns linked to faster trading and connections between venues.

About 11% of American share volume occurs on venues run by Bats, which called itself “a technology company at our core” in the IPO prospectus. Its founder, Dave Cummings, 43, sent an e-mail to traders yesterday saying that while Bats should suspend employee bonuses, the incident was no reason to dismantle the equities market structure.

‘Freak Event’

“This was a freak one-time event,” Cummings wrote. “The Bats matching engine has literally matched billions of orders without problems. However, the code to open an IPO is new. It has been tested in the lab, but until this week not in real- world production.”

Pulling the IPO hurt Bats and the brokerage and trading firms who steered it to prominence as a way of holding down fees when the New York Stock Exchange and Nasdaq Stock Market expanded by buying electronic rivals in the mid-2000s. The company was initially built to service brokers and high- frequency firms, which make trading decisions in milliseconds. Those companies include Tradebot Systems Inc., whose chairman is Cummings, and Getco LLC, both of which have stakes in Bats.

Ratterman wrote to customers and traders in a letter dated yesterday, explaining the technical issues, apologizing for the breakdown and pledging to do better in future.

<< Page 2 of 3 >>

Copyright 2014 Bloomberg. All rights reserved. This material may not be published, broadcast, rewritten, or redistributed.

comments powered by Disqus
Check out Futures Magazine - Polls on LockerDome on LockerDome