PhilStock: Glitch on the High-Frequency BATS Exchange

As one who takes a certain pleasure in ironic reflexivities, and is none too fond of the current system of high frequency computerized trading (HFT), I am amused to hear that the high-speed exchange, Bats Global Markets (BATS), was compelled to cancel its initial public offering (IPO) today because of errors in its own computer system which, incidentally, forced a halt in trading Apple! I hope that this will encourage further scrutiny of the HFT enterprise–not only because of their ability to radically move the market, sometimes in out-of-control ways, but also because of the advantage they enjoy by placing (and canceling) stock orders thousands of times a second, capitalizing on information about (intended and realized) trades seconds before everyone outside the HFT loop. Stock valuations have little to do with it. It is said that these densely-packed trading systems maximize the speed of trading to something close to the speed of light—correctly determined, I assume.

A fast-paced stock exchange trips over itself

By Michael J. De La Merced And Ben Protess, New York Times

The stock market claimed an unlikely victim Friday: one of its own.

Just as its shares started selling to the public for the first time, BATS Global Markets, one of the nation’s newest and largest electronic exchanges, halted trading on its own stock, after a series of technical glitches and errors in its system that also affected the shares of Apple (AAPL) and other companies.

A few hours after the embarrassing debacle, the financial company withdrew its initial public offering of stock. Investors who tried to buy the new shares will have their trades canceled, and owners who wanted to sell their stake will not be able to cash out for now.

While trading on the BATS exchange was back to normal in a few hours, the technical problems raise questions about the vulnerability of the broader market system, which has allowed new competitors like BATS to take on traditional exchanges like the New York Stock Exchange and Nasdaq.

As stock trading has shifted to high-speed computers and electronic exchanges, trading costs have dropped sharply. But regulators and others have worried that the increasingly fast-paced and fragmented market also poses a risk to investors. The fears intensified after the flash crash in May 2010, when the Dow Jones industrial average plunged roughly 700 points and quickly recovered in the same day. Some investors were caught in the downdraft, suffering unexpected losses.

Since then, regulators have struggled to fully understand the growing complexity of the markets and how to safeguard the system.

The initial public offering of stock should have been a moment of celebration for BATS.

Founded in 2005, BATS, which originally stood for Better Alternative Trading System, was started by a group of Wall Street companies that wanted to break the duopoly of the stock market. The initial offering of BATS, which would have been the first company to be listed on the exchange, would have represented the evolution from a tiny upstart to a serious competitor, rivaling the New York Stock Exchange and Nasdaq.

Although investor interest for the offering was tepid, BATS was able to raise $101 million, giving owners like the trading firms GETCO and Instinet a chance to sell their shares. The stock was priced at $16, at the bottom of the company’s expectations.

Friday began like any other at BATS. On the floor of the exchange in Lenexa, Kan., executives rang a bell at 9:30 a.m. to begin trading.

Then disaster struck.

At 10:45 a.m., BATS suffered technical errors, affecting securities with symbols A through BFZZZ. The market’s most valuable company, Apple, was swept up in the maelstrom. The BATS system executed “three erroneous trades” of the technology company, it said. As a result, shares of Apple sank to $542.80, prompting trading in the stock to be temporarily halted.

BATS’ own shares were ensnared by the mess. As trading began on Friday, BATS stock dipped to $15.25. Then extreme turbulence hit. A slew of bad trades at less than a penny sent the stock plunging. Though the trades were later voided, the plunge unnerved investors.

Read the rest:

The IPO of BATS, had it gone through, would have made BATS the first company to trade itself on its own (BATS) exchange. So maybe this is evidence of a Goedel-style result against having the same company serve as its own meta-exchange on which it trades itself?


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One thought on “PhilStock: Glitch on the High-Frequency BATS Exchange

  1. Pingback: PhilStock: Topsy-turvy game | Rejected Posts of D. Mayo

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