Bats Says Trading Error Affected Fewer Transactions

Bats Global Markets Inc., the stock exchange operator that acknowledged four years of bad trades, said the error affected fewer transactions than first estimated.

Computer problems allowed about 12,000 trades that violated rules intended to ensure all investors get the best prices for equities, fewer than the 440,000 estimated earlier, Randy Williams, a Bats spokesman, said by e-mail today. Customers lost $17,000, as opposed to $420,360, because of the error, he said.

Chief Executive Officer Joseph Ratterman had blamed the mistakes on regulations he says are too complex, specifically the regulatory ban on locked markets. Operators including NYSE Euronext have called for an overhaul of regulations that boosted high-speed trading and the fragmentation of equity markets to 13 stock exchanges and about 50 private broker-run dark pools from three dominant venues in the 1990s.

Bats disclosed the trading issues on Jan. 9 after an internal review. The Lenexa, Kansas-based company successfully deployed a fix for the error today, Williams said.

Regulation NMS, a rule the Securities and Exchange Commission adopted in 2005 and implemented two years later, prohibits exchanges from allowing locked markets, when a bid on one venue is the same price as the ask on another. The rule exists to increase the likelihood that someone quoting at the best price will receive an execution.

Race Conditions

The violations occurred in situations that programmers describe as “race conditions,” in which computers are communicating with each other in real time while adjusting to new information in the market. Computers that match orders for two Bats equity exchanges and an options venue allowed some trades to occur at prices inferior to the best available bid or offer and enabled others to violate rules for short sales, or bearish bets, the company said.

If the SEC permitted bids and offers on different exchanges to exist at the same price, it wouldn’t be necessary to have order types designed so customers can adjust their trade requests as prices change, Ratterman said at the time.

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