BATS CEO: Trade Problems Symptom of Too-Complex Market
Traders Magazine Online News, January 11, 2013
The software problem that caused BATS Global Markets Inc. to allow trades that violated rules is a symptom of overly complex market regulations that should be simplified, Chief Executive Officer Joseph Ratterman said.
BATS discovered the problem, which involved almost 450,000 transactions, on Jan. 4 through routine data inspections conducted by its operations department looking for anomalies in trades and how the exchange handles orders, Ratterman said in a telephone interview today. Brokers hadn’t detected it, he said.
The issue allowed technical infringement of rules aimed at preserving fairness in the U.S., where trading is fragmented across 13 exchanges and dozens of other venues. While losses to any single user would have been close to undetectable and the vast majority of BATS trades were executed correctly, the disclosure comes after a year in which breakdowns on exchanges sowed investor concern the nation’s electronic equity infrastructure is too complex to manage.
ALTERNATE VIEW: The system errors at BATS show the need for vigorous technology testing. But they shouldn’t be mistaken for an argument that the markets are too complex. Miranda Mizen, Tabb Group. Click here (Registration required).
“I think you could do away with a significant amount of complexity by simplifying some of the regulatory guidelines,” Ratterman said. “Nearly all the order types and functionality that exists in the market are there to allow trading participants to reflect their interest to trade and to be compliant with the regulatory structure we all live in. If the regulatory environment were to simplify, then the functionality customers demand to reflect their trading interest would simplify as well.”
“Despite automated testing, a plethora of order types makes it virtually impossible to catch every known scenario,’’ said Tabb Group research analyst Miranda Mizen, in an online commentary.
About 250 customers, mainly market-making firms, and 0.004 percent of 12 billion trades on BATS’s two equity exchanges were affected by the problem that dates to October 2008, Ratterman said. About 0.0009 percent of options trades were affected, he said.
While the revelations follow a year of high-profile exchange mishaps including BATS’s withdrawal of its own initial public offering in March, Ratterman doesn’t expect it to derail plans to pursue an IPO a second time.
“We’re going to keep our IPO plans warm,” he said. “We’re just watching the market. We’ll continue to monitor the investor appetite for the securities sector. Coming back is really a matter of timing.”
The Lenexa, Kansas-based company, started in 2005 by a high-frequency trader, operates U.S. equity markets that account for 12 percent of American share volume, compared with about 10 percent at the end of 2010, data compiled by Bloomberg show.
Machines that match orders for two BATS equity exchanges and an options venue allowed some trades to occur at prices inferior to the best nationally available bid or offer and enabled others to violate rules for short sales, or bearish bets, the company said in a notice published on its website. Customers lost $420,360 because of rule violations, Randy Williams, a BATS spokesman, said by e-mail.
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