BATS' Software Glitch: Bad Things Happen

The technical glitch at BATS Global Markets on Friday, which forced the stock exchange operator to withdraw its I.P.O., could not have happened at a worse time, but the computerized stock exchange should not be crucified.

Nearly every stock market has experienced a technical mishap at one point or another causing it to shut down trading for an hour or several hours. There have been snafus at the NYSE, Nasdaq and on the London Stock Exchange. Unfortunately, in BATS’ case the error occurred on a day when it was going to debut trading in its shares for sale to the public.

But within minutes staffers saw there was a computer software problem, according to today’s New York Times.

“matching program” used for stocks with symbols between A and BFZZZ had locked up, preventing orders from being fulfilled and leading to a nosedive in the stock price within seconds.

The software glitch caused BATS’s own stock to plummet from the auction price of $16 a share down to 4 cents —leading BATs to experience its own mini-flash crash. The I.P.O. for BATS shares could not roll into continuous trading. Also, the problem rattled shares of Apple Inc. because the symbol for the high-profile stock was on the same server.

To stem the crisis, BATS’ CIO Joe Ratterman wrote a heart-felt public letter of apology to clients.

Some critics of high speed trading are pouncing on this fiasco as evidence that U.S. equity markets are fragmented and broken. Regulators and other industry sources told the New York Times that market safeguards and other circuit breakers worked as they were supposed to. Once the BATS system failed, circuit breakers kicked in and the erroneous trades were canceled. BATS also notified the SEC within minutes of noticing the systems’ problems.

However BATS has always prided itself in operating like a lean, mean, efficiency machine out of its Kansas headquarters. In fact, the acronym BATS stands for Better Alternative Trading System. While other exchanges had hundreds of staff in IT, BATS had a fraction of that amount- perhaps 70. The question is are they too leanly staffed with not enough hands on deck? Do they need to beef up their quality assurance staff or was it their monitoring software.

In today’s New York Times, Senator Charles E. Schumer said the incident pointed to "cracks in the fragmented market where not all players were held to the same time-tested standards,” implying that new computerized markets like BATS were allowed to launch markets with less rigorous testing than the established players like NYSE are held to.

But in his letter, BATS’ CEO Ratterman wrote that even after six months of rigorous testing including testing with customers that technology can fail and the unexpected can happen. It seems like BATS bore the brunt of the failure, a public embarrassment that could tarnish its reputation. However, customers traded away through other rivals, the way the way they are supposed to, Ratterman told CNBC this morning.

However, CNBC media pundits are saying it’s incredible that this glitch happened on the day of the company’s I.P.O. and that is really raises questions about the regulation of stock exchanges. BATS pulled the I.P.O. realizing that the software failure had eroded investor confidence, and it may have feared, that reopening the I.P.O. could result in a sell-off by institutions.

On the other hand, BATS’ historical reliability has been very strong, with 99.9 percent uptime on its primary BATS BZX exchange for the past 3-plus years, according to Ratterman in his letter. I believe the incident should be put into perspective. Regulators should look into what happened, but let's not blow it out of proportion.