Up to BATS: An IPO Swing and a Miss


By: Thomas Michael

There is nothing more embarrassing for a baseball player than an unforced error – especially when that error consists of tripping over your own feet, falling on your face, and getting hit in the back of the head by the ball you were supposed to catch easily. This is the essence of what happened to BATS Global Markets in its major league debut. And the BATS IPO disaster may have far reaching consequences for both the company and other high-frequency trading platforms that are the focus of a recent SEC probe.

BATS is currently the third largest stock exchange in the United States, accounting for about 11% of all equity trading on a daily basis. BATS offers traders a cheaper private alternative to the consolidated Wall Street behemoths – NASDAQ and NYSE. As a computer-driven exchange, BATS is a favorite forum for technologically savvy investors to utilize powerful systems and to engage in rapid fire trading. BATS’ electronic foundation is both its greatest asset and its largest risk, as was exemplified by the company’s failed IPO.

On March 23, 2012, BATS Global Markets held its IPO on its own stock exchange, pricing shares at $16 and expecting to raise over $100 million, but the offering did not go as planned. First, BATS shares opened down a disappointing 75 cents at $15.25. The sun in the eyes of the baseball player. Second, a glitch in BATS own operating software caused the share price to drop suddenly to less than 1 cent. The baseball player trips over his own feet. Third, the system glitch causes confusion affecting companies with ticker symbols from A to BF, resulting in a 9% drop in Apple and forcing the exchange to suspend trading for five minutes. The baseball player falls on his face. Finally, under intense pressure from investors and would-be shareholders, BATS decided it was necessary to kill the initial public offering in order to avoid almost certain litigation and damage to the company’s credibility. The ball hits the baseball player in the back of the head as he lays on the ground, defeated and embarrassed.

The IPO debacle did not destroy BATS altogether, as trading has returned to normal levels on the exchange, but it did have significant repercussions for the company. On March 28, 2012, BATS CEO Joe Ratterman was told to step down from the chairman position by the board of directors, although he will most likely remain as one of the company’s executives. BATS’ founder Dave Cummings stated that bonuses should not be paid as a result of the mistake, particularly bonuses that were dependant on the IPO’s success. The failure of the IPO may also have cost lead underwriter Morgan Stanley and other banks around $7.1 million in fees. The banks’ expenses will need to be reimbursed and some type of fee may still be assessed even though the offering failed. Worse still, investor confidence in the company may have been irreparably damaged.  To date, BATS has not disclosed any plans for another initial public offering.

The most significant consequences of the BATS IPO disaster likely will be felt across the computer-based trading industry, as the SEC has been investigating high-frequency trading for a few years. In particular, the SEC probe is examining whether rapid-fire trading firms have used computerized stock exchanges, such as BATS, to gain an unfair advantage in the market. These high-speed trading firms use complex computer systems to trade large amounts of stocks quickly, often holding them for less than a second at a time. The SEC fears that high frequency trading could allow firms to work together to manipulate the market before anyone else can react. Trades moving at fractions of a second may also expose the market to increased levels of risk. The “flash crash” of May 2010 caused the Dow to fall nearly 700 points in 5 minutes due to glitches in computer trading software and then recover in less than half an hour. While the glitch that killed the BATS IPO does not exemplify the type of unfair advantage the SEC is investigating, it does underscore the issues and risks of computer based trading platforms.

If the BATS IPO accomplished one thing it was to provide ammunition to critics of a computer-based market and to renew efforts to reform system safeguards. The SEC has proposed replacing the current circuit breaker safeguard system with a plan called “limit up, limit down.” The circuit breaker system was implemented following the 2010 “flash crash” and causes trading to be automatically suspended if individual stocks fluctuate widely in a five-minute period. This is why trading of Apple was temporarily halted on March 23rd when the share price suddenly dropped by 9%. The SEC’s new plan is more complex and aims to avoid suspending a stock by first taking 15 seconds to evaluate whether a certain event or erroneous trade had prompted the erratic stock movement. In theory, this would have allowed Apple to continue trading and nullified the erroneous transactions. These safeguard measures will hopefully protect the markets from future malfunctioning computer software.

Most market commentators remain confident in computer-based trading systems and do not feel that the BATS disaster, or the “flash crash,” should cause the markets to retreat from new technologies. But it does serve as a warning. Computer-based markets are susceptible to unpredictable complications, market manipulation, and even potential malicious attacks by hackers. Given these risks, one would hope that BATS’ error-laden debut will encourage computer-based exchange platforms and high-frequency participants to spend more time in the batting cage before stepping up to the plate.


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Fordham Journal of Corporate & Financial Law