It was announced on Friday that Bats Global Markets Inc. computers permitted trades that were in violation of rules that make sure investors receive the best prices for equities over a span of four years, according to Bloomberg. Bats Global Markets Inc. is the third-largest United States stock exchange operator.
A spokesman for the company, Randy Williams, said in an email that customers lost $420,360 as a result of the rule violations.
“Once again, we see there’s a problem with electronic systems, this time an exchange system,” Larry Harris said. Harris is a finance and business economics professor at the University of Southern California. Harris is also the former chief economist at the U.S. Securities and Exchange Commissiom. “Bats will get a lot of scrutiny from the SEC at a time when nobody wants that kind of attention. That said, it’s important to recognize that Bats itself identified the problem and brought it to public attention and to the attention of regulators.”
The trades were allowed inadvertently by the computers at Bats despite the rules. One of the rules that the computers violated involved offering the best nationally available bid and offer. According to the company, some of the mistakes happened with price-sliding orders that re-price trade requests based on the movement of the best bid nationally or offer.
The inferior price trades at Bats occurred a total of 433,000 times, which is an average of 410 times per day from October of 2008 to January of 2013 on the main stock exchange for Bats. The trades are called trade-throughs because they ignore the best available offer or bid. On the second stock exchange for Bats, 8,000 similar transactions occurred. On the options market for Bats, 617 transactions occurred, according to the company. Short-selling violations were present in over 3,600 transactions across the company’s equity venues.
The problem was identified during an internal review and that no customers reported the issue to the company.
“It’s a miniscule amount of trades but I don’t think the regulators have the tools to keep up with the technology that’s out there and the sheer number of quotes and trades going on,” Joseph Saluzzi said. Saluzzi is the co-head of equity trading at Themis Trading LLC in Chatham, New Jersey. “Is this happening at other exchanges? Can I trust regulators to find out? I don’t know.”
Saluzzi also said, “Bats is a self-regulatory organization and they’re the first line of defense. But it’s for the SEC to come in and say maybe some of these order types shouldn’t be approved because the market is too complex.”