01.14.2013

Bats Trading Glitch Ramps Up Investor ‘Paranoia’

01.14.2013
Terry Flanagan

In terms of trading glitches, the new year seems to have picked up in much the same vein as 2012.

With 2013 still only a matter of days old, exchanges have already suffered a series of problems including the New York Stock Exchange experiencing a server outage on January 8 that interrupted the delivery of trade data on dozens of stock, while Nasdaq’s consolidated tape feed went totally blank for a time on January 3. And the London Stock Exchange kicked off the first trading day of the year with a technical glitch that delayed the release of 100 company announcements by around 90 minutes.

And on top of this, Bats Global Markets issued a note on January 9 alerting traders that its two equity exchanges and one options exchange in the U.S. had allowed certain trades from October 2008 to violate rules intended to ensure traders get the best prices. U.S. securities law states that all orders must be at the best bid or offer price.

Bats said traders had lost $420,361 in total and in total 436,528 trades were affected, but said the problem would likely be fixed by the end of the month.

Paul Squires, head of trading, Axa IM

Paul Squires, head of trading, Axa IM

“It doesn’t sound too much, but it highlights the problems that regulators have to monitor the level of traffic and markets these days and it will fuel the ‘flash crash’ paranoia—the perception that market structure is flaky and there is not enough governance around trading,” Paul Squires, head of trading at Axa Investment Managers, a French-headquartered institutional investor, told Markets Media.

Bats, who discovered the problem itself, said it was looking at ways to reimburse its customers for the losses.

“We will explore with the Securities and Exchange Commission the extent to which we can provide compensation retroactively regarding this issue,” said a Bats spokeswoman.

“Bats identified the issue internally through an internal review. None of our members reported the issue during the entire duration of its existence.”

In its notification on its website, Bats detailed in what situations the problem had arisen. “There are certain cases where the matching engine will allow for a trade through or an execution of a short sale order at a price that is equal to or less than the NBB [national best bid] when a short sale circuit breaker is in effect,” it said.

The Bats spokeswoman added: “The issue only exists in a relatively rare situation where another exchange locked or crossed an order resting on our exchange book.”

It is the latest blow for Bats, who last March had to pull its initial public offering after a technical glitch saw its own share price slump following the launch.

Other high-profile snafus to hit last year included the botched Facebook IPO as well as the near-catastrophic software malfunction suffered by Knight Capital, which saw the U.S. market maker lose $440 million in just 15 minutes, all of which have left investor confidence at a low ebb.

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