Market Survives Bats' Failed IPO; Will Bats?

As far as bad days go, Bats Global Markets had an all-timer on Friday. The term "perfect storm" was created to describe days like that one.

On March 23, a software bug caused havoc on the exchange operator's trading platform. The bug in question was one connected to the trading of its very own initial public offering (IPO), the result of which forced the company to pull its IPO, a rarity. Erroneous prices were sent out. And if that wasn't bad enough, three erroneous prints, according to Bats, sent Apple's stock down more than 9 percent, which kicked off a circuit breaker that froze the trading of Apple for five minutes.

Haywire "bug." Failed IPO. Apple─a company with the biggest market cap in history─tanks. It was a trifecta of bad headlines.

To be fair to Bats, these things happen, but when they do they usually tend to be far less visible; it's not often that the Bats Exchange is on the lips of local news reports in rural places outside of Kansas, where the company is headquartered.

"I don't think [that other exchanges are] trying to make hay out of the problems that happened at Bats because they all know it could possibly happen to them, as well," says David Downey, chief executive officer of OneChicago Exchange. "I can't believe that anybody could've imagined that this would happen, but this is the nature of software─you build, you test, you build, you test and find those things that go wrong."

Downey praised Bats for what it has made itself, becoming an exchange of a dozen or so staffers into the third largest exchange owner in the United States. He says that the company is staffed by "bright people". As such, he says that he believes that this will not mark "the death knell" for Bats; in fact, he says Bats will be stronger for it.

"The beauty of it─and this is what needs to be stressed─if this was a real problem it will be fixed; it will be fixed and it will be better and I absolutely believe that," Downey says. "People of this caliber, troubling as the event may be, they will fix the problem and they will be stronger for it─if it doesn't kill them─and that means the marketplace will be stronger for it."

According to the company, this was the first corporate IPO run on the Bats Exchange. The Bats IPO auction system glitch, through a bug in the system, led to those three erroneous trades that sent Apple's stock reeling. Apple was back up and running within five minutes and those three trades were later broken. (Bats says that it is putting its plans to go public on hold "for the foreseeable future.")

To find a bright spot, it showed that "the industry's single stock circuit breaker system worked as planned and proved that recent improvements in US equity market structure are working as intended," notes Bats chief executive Joe Ratterman in a statement.

Irene Aldridge, managing partner and quantitative portfolio manager at Able Alpha Trading, agrees with this assessment. While this represented unfortunate timing, she says it was simply a glitch and it showed that the system, as a whole, has improved on its reactionary capabilities.

"I think this instance showed how well the inter-exchange system is working: Nasdaq recognized the glitch and proceeded to trade seamlessly with the Bats glitch in mind─a key learning from the [May 6, 2010] Flash Crash," Aldridge says.

As Ratterman notes, "sometimes technology implementations are prone to failures and unexpected outcomes, even after going through rigorous testing." To that point, this failure certainly served as a wakeup call to the industry as a whole.

Downey says that he spent the weekend thinking about his systems, wondering if there were any bugs lingering: "We always have that worry."

It's not just Downey─when you are running an exchange platform it's always a question that's rattling around in the back of your head, admits Richard Carleton, interim CEO at the Canadian National Stock Exchange, which runs the alternative trading venue Pure Trading.

"Exchanges all around the world that use algorithms for the trading process have had instances of things that didn't work on the first few days that they were released into public─it's not uncommon," he says. "If anything, it serves as a reminder that you can't ever invest too much into your quality assessment (QA) processes. As the operator of a trading platform, that's always something that's in the back of your mind. When you're releasing new code into production there always the question of, ‘Have we done enough of the QA and third-party testing, and will the application perform?' Often enough, it does not."

The Bottom Line
In addition to the sources mentioned above, WatersTechnology spoke to several other industry participants who had only positive things to say about Bats' technology and how this was an unfortunate situation. But there also seems to be a belief that this is an example of how the systems surrounding the overall inter-connectedness of the industry are improving. As Ratterman is quick to point out, the overall equities market "was virtually unaffected due to new regulatory solutions."

Even still, that hasn't stopped opponents of high-frequency trading and those against the general proliferation of exchanges from using the event as a jumping-off point for spotlighting further market ills. These events don't happen in a vacuum and it will be interesting to see if this event gets politicized.

On batstrading.com, a pop-up greets visitors saying, "We know we can do better. And we will." If Bats is to get back its reputation, it will have to live up to that statement very quickly.