Why U.S. Securities Markets Should Have Fewer Moving Parts
I remember once reading a car review about a beautiful Mercedes in which the author noted that he was able to count something like 48 moving parts in the fold-away ashtray, a sign of the German carmaker's penchant for over-engineering. The author noted that an ashtray with three moving parts would have worked as well and cost less.
The same might be said of U.S. securities markets. The latest evidence is the disclosure by Bats Global Markets Inc. that its computers made mistakes over the past four years. Although the errors weren't huge, the trades violated rules designed to ensure that investors receive the best prices when they buy or sell.
To its credit, Bats discovered the error on its own, and the losses, which affected about 250 customers, amounted to roughly $420,000.
Bats Chief Executive Officer Joseph Ratterman said the software snafus were a symptom of excessive complexity in market regulations. To which one might say, excessive market complexity begets excessively complex regulations.
It is worth a reminder that Bats is the same company whose computer systems went haywire in March when it was trying to take its own shares public, touching off a temporary plunge in the stock of Apple Inc. The company blamed that failure on flaws in its software and withdrew its initial public offering.
Software was also the main culprit behind a blowup in August at Knight Capital Group Ltd. Computers executed flawed, money-losing trades for more than a half-hour before someone flipped the "off" switch. Knight suffered about $440 million in losses and had to sell itself to avoid closing.
And then there was the Facebook Inc. (FB) IPO in May, when computer problems led to errant trades on the Nasdaq OMX Group Inc. electronic exchange. Among the losers was Swiss bank UBS AG (UBSN), with losses of about $350 million.
Those are the big, attention-getting breakdowns, but lesser ones happen all the time. For instance, the New York Stock Exchange yesterday was unable to display trade and price-quote information for stocks in the ticker symbol range of SJ through TCZ. The glitch lasted about an hour.
There are 13 exchanges in the U.S. and dozens of private trading venues. And Ratterman has a point: The proliferation of rules is mind-numbing. At some point, regulators and market participants might think about a structure with fewer moving parts.
(James Greiff is a member of Bloomberg View’s editorial board. Follow him on Twitter.)
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