BATS Blames Market Rules for Mishaps
January 11, 2013
BATS Global Markets Inc., the stock exchange operator that acknowledged four years of trading errors, blamed the mistakes on regulations it says are too complex.
The rule violations at BATS, which canceled its initial public offering last year after its own computer systems kept the stock from trading, threaten to further erode confidence in U.S. stock exchanges. Operators including NYSE Euronext have called for an overhaul of regulations that boosted high-speed trading and the fragmentation of equity markets to 13 stock exchanges and about 50 private broker-run dark pools from three dominant venues in the 1990s.
“The challenge facing a lot of the exchange providers is that the market structure in America has become far too complex,” Thomas Caldwell, who oversees about $1 billion as chairman and chief executive officer of Toronto-based Caldwell Securities Ltd., said in a phone interview. “It’s very easy in the complex market structure for minor errors to occur and not be detected because of the multiplicity of the exchanges that the SEC has created.”
The order types that produced the error at BATS are used to comply with regulations the U.S. Securities and Exchange Commission implemented in 2007 to ensure all investors get the best prices for equities, Chief Executive Officer Joseph Ratterman said in a phone interview yesterday. Simpler rules would limit such technical mishaps, he said. The Lenexa, Kansas- based company intends to reimburse clients for the $420,360 lost because of its errors since 2008.
The SEC is investigating the rule violations and government officials are concerned about similar order types at other exchanges, according to a person familiar with the situation. Still, BATS’s errors are probably specific to the company’s trading processes, said the person who asked not to be named because the matter is confidential.
“We routinely review these matters with the exchanges as part of our oversight,” John Nester, an SEC spokesman, said in an e-mail yesterday. Ratterman declined to comment on a potential regulatory response.
Exchanges shouldn’t rely on regulators to catch errors and need to be more vigilant about checking and testing their systems, said Thomas Garcia, head of equity trading at Santa Fe, New Mexico-based Thornburg Investment Management Inc. The mishaps at BATS raise concern about the possibility of other software breakdowns in the industry, he said.
“The exchanges and these guys that are trading at really high speeds, they need to make sure their systems are good before they start,” Garcia said by telephone. His firm oversees more than $80 billion. “It falls on the exchanges. The regulators are there to help regulate and facilitate that sort of thing. They can only look at so many trades.”
The errors don’t suggest the industry is incapable of overseeing itself, Ratterman said. Among the approximately 250 members affected by the breakdown, five firms lost more than $10,000 and 74 lost less than $100, Stacie Fleming, a spokeswoman for BATS, wrote in an e-mail.
Inspection of operating systems is an ongoing practice, said Rich Adamonis, an NYSE Euronext spokesman. Jim Gorman, a spokesman for Jersey City, New Jersey-based exchange operator Direct Edge Holdings LLC, declined to comment on the status of its computer systems. Rob Madden, a spokesman for Nasdaq OMX Group Inc., also declined to comment.