BATS into hell

26 Mar 2012 By Antony Currie

The botched BATS initial public offering could be disastrous for the upstart electronic exchange. It scrapped its market debut on Friday after shares crashed from their $16 opening to just 2 cents after a “serious technical failure.” It’s a potential killer for the company, which is already the focus of investigations into high-frequency trading. The good news is that the stumble didn’t catalyze a broader market meltdown.

That at least offers some reassurance that the infrastructure of U.S. equity markets is far more robust than it was at the time of the so-called Flash Crash of May 2010. Markets tanked 9 percent in seconds then, after a few random trades kicked off a tailspin across the many electronic trading platforms and exchanges handling U.S stocks.

Friday’s flop had the latent power to create a similar fiasco. BATS accounts for some 11 percent of U.S. equity trading volume, much of it from firms using supercomputers moving in milliseconds. Instead, the damage was limited. There was the hit to Apple, the $600 billion powerhouse, whose shares were briefly halted after dipping 9 percent. The erroneous trades were swiftly nullified before the iPad maker’s stock was back up and running.

It’s a welcome sign that improved circuit breakers installed after the Flash Crash appear to be working well. That won’t, however, comfort BATS employees or investors, including the IPO’s underwriters Morgan Stanley, Citigroup and Credit Suisse.

Wall Street traders, however, can be pretty agnostic about where to send their orders. And BATS is hardly the first exchange to have technological issues – though greater scrutiny of, or even restrictions to, high-frequency trading may harm BATS more than others.

And BATS managers aren’t the only ones struggling to run an exchange. Multiple mergers have failed or been rejected by regulators over the past year as the industry aims for greater global scale amid withering margins. A botched IPO is a different matter, though. It’s embarrassing for any company, but especially for one hoping to handle IPOs as a core part of its strategy. So while the unplanned trading stress test may give some comfort to investors, they may not rush back soon to BATS.


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