BATS Says System Errors Affected Pricing For 4 Years
Traders Magazine Online News, January 10, 2013
BATS Global Markets Inc., the third- largest U.S. stock exchange operator, said its computers allowed trades that violated rules intended to ensure all investors get the best prices for equities over a period of four years.
Machines that match orders for two BATS equity exchanges and an options venue allowed some trades to occur at prices inferior to the best 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 yesterday. Customers lost $420,360, because of rule violations, Randy Williams, a BATS spokesman, said by e-mail.
The issue allowed technical infringement of rules in the U.S., where trading is fragmented across 13 exchanges and dozens of other venues, aimed at preserving fairness. While losses to any single user would have been close to undetectable and the vast majority of BATS trades executed correctly, the disclosure comes after a year in which breakdowns on American exchanges sowed concern the nation’s electronic equity infrastructure is too complex to manage.
SEC Scrutiny
“Once again, we see there’s a problem with electronic systems, this time an exchange system,” Larry Harris, a finance and business economics professor at the University of Southern California in Los Angeles and former chief economist at the U.S. Securities and Exchange Commission, said in a phone interview. “BATS will get a lot of scrutiny from the SEC at a time when nobody wants that kind of attention. That said, it’s important to recognize that BATS itself identified the problem and brought it to public attention and to the attention of regulators.”
SEC spokesman John Nester declined to comment in an email.
BATS’s computers inadvertently permitted trades counter to specific rules. One regulation involves the best bid and offer, a central concept aimed at ensuring that even as exchanges proliferate, investors who want to buy and sell shares can be confident they are getting the best prices.
The short-sale circuit breaker, implemented in 2011, was intended to prevent investors from driving down share prices when a stock had already fallen 10 percent from the previous day’s closing level. The curb limits the price of short sales relative to the national best bid.
Price-Sliding
BATS said some mistakes occurred with so-called price- sliding orders that re-price trade requests based on the movement of the national best bid or offer, under specific circumstances involving other orders. Additional infractions took place when orders pegged or tied to the national best bid or offer traded through that level or executed at a price not permitted under the short-sale rule because of the actions of unrelated other orders.
The trades at inferior prices, called trade-throughs because they trade through or ignore the best available bid or offer, happened 433,000 times, an average of 410 a day from October 2008 to January 2013 on the main BATS stock exchange, the company said. Almost 8,000 similar incidents occurred on the second BATS stock exchange and 617 on its options market, the firm said. Short-selling violations involved more than 3,600 incidents across its equity venues, BATS said.
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