Ed Zurga for The New York TimesTrade desk specialists working on the floor at BATS Global Markets in October 2009.The exchange operator BATS Global Markets styled itself as the future of stock trading — faster, more efficient — when it began in 2005. Its name stood for Better Alternative Trading System.
Despite a very public setback for BATS on Friday, the future of stock trading still looks to be one dominated by rapid-fire computerized trading and a panoply of trading platforms like BATS.
On Friday, the exchange operator botched the listing of its own initial public offering, momentarily rattling shares of Apple, one of the most widely held stocks, and briefly resembling a tiny version of the so-called flash crash in May 2010.
While the short disruption on Friday appeared to give ammunition to critics of the current market system, both regulators and people in the industry said the incident simply illustrated that market safeguards worked as they were intended. A minor, if embarrassing, market hiccup was prevented from metastasizing into something worse.
Regulators pointed to the use of so-called circuit breakers that kicked in once the BATS system failed. The market was stopped, they said, and the erroneous trades were canceled.
Ed Zurga for The New York Times
Joe Ratterman, the chief executive of BATS Global Markets.
But the event does illustrate the continued need for sophisticated tools like circuit breakers, policy makers said.
“This shows the cracks in a fragmented system in which not all players are necessarily held to the same time-tested standards,” Senator Charles E. Schumer, Democrat of New York, said in a statement.
The circuit breakers on individual stocks that fluctuate wildly in a five-minute period were adopted as a pilot program by the Securities and Exchange Commission in the wake of the 2010 flash crash, when a series of trades combined to cause the Dow Jones industrial average to plummet more than 700 points in a matter of minutes, only to recover within a half hour.
That program is set to expire this year. The S.E.C. has proposed replacing it with a more complex proposal that would cancel erroneous trades without halting a stock. Before deciding to halt a stock, the system would take 15 seconds to evaluate whether there was an event that had prompted the stock movement or whether it was an erroneous trade.
Friday’s trading event is expected to bolster the commission’s case for the proposal. Its plan, called “limit up, limit down,” would in theory have prevented the halt in trading of Apple’s stock.
BATS blamed its problems on a “software bug” that prevented orders for its own stock from being filled on Friday. Within a matter of seconds, a flurry of sell orders pushed the price of the company’s shares down to a fraction of a penny before being suspended. The flaw also led to a brief halt in the trading of Apple, after an erroneous trade in its shares led to a drop in its stock.
In short, it was what one analyst called a “perfect storm.” “It had been a tough Friday, and it’s been a tough weekend,” Joe Ratterman, the BATS chief executive, said in an interview by phone on Sunday. “We feel absolutely terrible about letting our customers down.”
Mr. Ratterman said BATS had spent over a year preparing for the most prominent undertaking in the company’s history: listing its own stock. Among the company’s biggest points of pride is the stability of its systems. BATS noted in its prospectus that its markets were available more than 99.9 percent of the time.
Company employees spent weeks conducting daily tests to make sure that BATS systems could handle the I.P.O. of a company.
Yet, as Mr. Ratterman and his team watched the order book build for BATS stock on Friday morning, it became clear within seconds that a problem had arisen. Staff member were quickly dispatched to diagnose and fix the software problem, and within minutes the company had called the S.E.C. to alert the agency.
Though BATS had sorted out its technical trouble by 12:50 p.m. on Friday, just over two hours after they began, company executives soon decided that too much uncertainty had been built up that would linger over any trading in the shares. They then made the tough decision to scrap the initial offering altogether.
Some damage had been done. The company’s market share, which normally hovers around 11 percent of daily stock trading volume, dipped several percentage points, as customers rerouted trades to other exchanges. And Mr. Ratterman said no BATS executive would get bonuses tied to the I.P.O., given its cancellation.
But he insisted the scope of the damage was limited.
“Our system failed,” he said. “I don’t believe that had a material impact on anyone else.”
One of BATS Global’s most outspoken defenders is David Cummings, who founded the company in 2005 with the intention of whittling away at the duopoly of the New York Stock Exchange and the Nasdaq stock market. In a widely distributed e-mail on Sunday, he called the Friday incident “a freak one-time event” and said BATS had completed billions of previous orders with no problem.
Few industry executives, analysts and regulators say they believe BATS Global’s troubles indicate a bigger problem with today’s rapid-fire computerized trading. Mr. Cummings, who is a director of BATS, defended the modern markets in his e-mail, arguing that they had provided huge savings to investors at the expense of “old middlemen” who lost fat profit margins.
“There’s no going back to the horse-and-buggy days of yesteryear,” said James J. Angel, a professor at Georgetown University. “In our current structure, if one exchange has a problem, most of the time the market can trade around it.”
Even a BATS rival, Duncan L. Niederauer, the chief executive of NYSE Euronext, declined to blame high-frequency trading for BATS Global’s troubles. “I don’t think we’ll hear that H.F.T. had much to do with this morning’s debacle,” he told CNBC on Friday afternoon.