No one has floated as badly as exchange operator BATS Global Markets. In 2012, his papers were canceled due to a failure, the reasons for which are still not clear. We tell the story of the stock market crash.

BATS Global Markets emerged in 2005 as a high-frequency trading (HFT) exchange platform. Its founder, programmer Dave Cummings, did this in response to the takeover of small exchange operators by the giants NYSE and NASDAQ, which at some point took 90% of the exchange services market and raised commissions.

Commissions are a critical factor for high-frequency HFT traders who make a huge number of intraday trades: the volume of these trades translates into a significant commission that can eat all the profits. BATS offered lower rates. The company focused on electronic services for trading and used the most advanced software.

And the new operator succeeded: BATS quickly lured many HFT traders (both private and institutional) to itself, taking about 10% of the market in a few months. A couple of years later, she entered the European market. The company had several platforms (BZX Exchange, BYX Exchange, Chi-X) that provided BATS with a net profit.

By 2012, in the wake of the success, BATS decided to go public and place 6 million securities itself. At the time of the IPO, it was the third-largest exchange operator in the United States, controlling 11% of the stock market volume and 3% of the volume of stock options. The placement range was planned at $ 16-18 per share. The main feature is that the initial listing was supposed to be held on its own BZX floor, and not on the NYSE or NASDAQ.

The IPO turned into a nightmare and only lasted 9 seconds

Trading started on March 23, at 11:14 local time, from $ 15.25. Then events developed as rapidly as possible: in just a second, the price of one share fell to $ 3. In the next second, the shares depreciated almost to zero in the literal sense of the word – they fell to $ 0.0002. Then the price rose to $ 0.04.

Большая часть падения заняла всего 900 миллисекунд

It was all over in 9 seconds – trading was stopped. The investors who participated in the IPO did not have time to understand anything and saw the stock exchange’s securities already depreciated.

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Just 17 minutes before the IPO, there was another strange glitch. According to Bloomberg, Apple shares, traded on one of the BATS platforms, briefly fell by about 9% from above $ 598 to $ 542.8, due to which trading was suspended. The collapse was caused by only one deal for 100 shares, and before the stop, two more were made, which returned the securities to their previous level. It is impossible to bring down super-liquid Apple shares with just one deal – it is obvious that something was wrong with the BATS exchange that day.

The cause of the disaster was named after 8 hours. BATS chief executive and chief executive Joe Rutterman told the Financial Times that despite all the software tests, a unique combination of orders failed. The installation of the IPO software caused an error immediately after 10:45 am and affected all stocks with tickers starting with letters from A to BFZZZ, including the stock exchange’s own stocks.

The funny thing is that the BATS sites before the failed IPO were considered the most technologically advanced and reliable: Bloomberg wrote that, according to the company, the BZX exchange was available 99.94% of the time, and BYX – 99.998%. BZX processed about 29 thousand orders per second on average.

Later, BATS admitted that a certain system error, long before the IPO, had an impact on trading in general: it turned out that since 2008, more than 400 thousand transactions on the exchange were carried out at prices different from national ones, which was a violation of laws. For this, the regulator fined BATS.

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The deals of that day were canceled and the IPO was canceled. The story turned out to be very similar to the famous Flash Crash, arranged by an autistic trader Navinder Singh Sarao.

Conspiracy Theory Around BATS IPO: Crash May Have Been Deliberately

Although the official cause is a software glitch, there are other versions. Chicago-based market data provider Nanex analyzed all data in fractions of a second during what is arguably the shortest trading in history. According to them, the collapse was ensured by 567 operations, which were carried out by an HFT algorithm launched from an unknown terminal that had direct access to the NASDAQ – it was on this exchange that the deals collapsed in quotes were made.

The algorithm sent orders in lots of at least 100 shares, which had to be either immediately executed or canceled – that is, it made so-called IoC (Immediate Or Cancel) flash orders. In just a few seconds, this lowered the quotes to zero.

Nanex drew attention to the fact that failures with an abnormal drop in quotations on the BATS stock exchanges were recorded not only in Apple shares but also in Bed Bath & Beyond, Amgen, and Acorda Therapeutics. There were also other oddities: it turned out that trading activity in BATS securities was observed as early as 10:45 – even then the first actual transactions began. The firm’s specialists asked the question: how could trading begin before the official start by almost 30 minutes, during which 952 transactions were made.

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Nanex directly hinted at numerous oddities, but did not draw any conclusions and just listed all the facts. Whether this was a real targeted attack by specific attackers or whether it was all just a coincidence that happened on the very day of the IPO, it is not known. Nanex’s investigations were ignored – BATS Global Markets itself took full responsibility, no serious investigation was carried out.

BATS still had a successful IPO four years later

Joe Ratterman, President, and Chairman of the Board of Directors of BATS Global Markets called the incident a shame and just a few days later lost his second post.

The site received a colossal reputational blow. “I think some companies might say, ‘If they can’t do their own IPO, then how are they going to place our shares?’ There is a problem with the credibility of the BATS listing, ”Dennis Dick, a consultant at Bright Trading LLC, told Reuters.

In 2013, BATS acquired rival Direct Edge and became the largest ETF exchange operator and the second-largest stock market operator, ahead of NASDAQ.

In 2016, BATS Global Markets decided to repeat the IPO – again on its own platform. This time, the company prepared itself seriously: the tests took 100 days, the trading volumes were worked out, three times exceeding the volumes on the day of Facebook’s IPO in 2012.

This time everything went well: on the first day of trading (April 15, 2016), securities jumped 21%. The company raised over $ 250 million in the largest IPO of the year to date.

Now BATS belongs to the company that owns the Chicago Board Options Exchange Cboe Global Markets, which acquired it in 2017 for $ 3.2 billion. The new owner delisted – and now BATS securities are no longer traded on the exchange.

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