Bats blaming code in IPO stirs concern on market complexity
NEW YORK — The software error that derailed the initial public offering of Bats Global Markets Inc., where 11 percent 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 Friday IPO after a computer malfunction kept Bats from trading on its own platform and forced a halt in Apple, 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 percent from at least 80 percent 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, Ala., said in a phone interview yesterday. “That it was corrected quickly helped. But the fact that it happened at all makes people just stand back.”
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 and Deutsche Bank that own stakes in Lenexa, Kan.-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 and Credit Suisse Group. Banks on the IPO will lose $7.1 million in fees because of the withdrawal, data compiled by Bloomberg show.
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. Bats's board, which hasn't discussed any leadership changes, will meet this week to consider options and it's yet to be determined if another IPO will be attempted, Ratterman said in a Bloomberg television interview Monday.
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 percent 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.
Bats priced 6.3 million shares on Thursday 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 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.
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 percent, 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 Saturday 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.”
BZX Exchange, its main market, was accessible to users 99.94 percent of the time last year, according to a regulatory filing. BYX Exchange, its second market, was available 99.998 percent of the time, the company said. The main market processed an average of about 29,000 order messages per second.
The 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, technical problems that affect trading are becoming routine.
“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. “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.”