RiskMarket RiskBATS Admits System Error Caused Pricing Problems

BATS Admits System Error Caused Pricing Problems

US-based stock exchange operator BATS Global Markets announced on 9 January that a system error dating back to October 2008 caused hundreds of thousands of transactions to be executed at prices that were not the best available.

The error, which may have caused BATS to breach securities rules, resulted from computers backing the company’s two equity exchanges and one options exchange allowing some short-sale orders to be executed at prices that were equal to or less than the national best bid or offer price (NBBO), the company told traders in a statement on its website.

The third-largest US stock exchange operator by volume, BATS said that it was working to rectify the error by 25 January. A spokesman for the company told the
Financial Times
that although a total of 436,528 trades were affected, its customers lost a total net amount of less than US$500,000 over four years from the inferior prices received and that means of providing compensation retroactively would be explored.

US securities law stipulates that investors must get the best possible price and share orders are to be transacted at the best bid or offer in the market. “There are certain cases where the matching engine will allow for a trade-through or an execution of a short sale order at a price that is equal to or less than the [national best bid] when a short sale circuit breaker is in effect,” BATS said.

The company had to call off a planned initial public offering (IPO) to raise over US$100m in March 2012, when a technical issue on its own exchange caused its share price to plunge in the opening moments of its float. BATS subsequently raised $300m of junk-rated debt to fund a dividend payout to shareholders in November, but credit rating agency (CRA) Standard & Poor’s (S&P) warned at the time that it would consider a downgrade on the debt if BATS was to encounter any further operations problems.

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