BATS Global Markets: The 'spectacularly botched' IPO

The Week's Editorial Staff

America's third-largest stock exchange saw its own shares plunge on the first day of trading — along with its reputation

Friday was supposed to be a coming-out party for BATS Global Markets, the flashy new stock exchange that recently became the country's third-largest trading platform behind the New York Stock Exchange (NYSE) and Nasdaq. BATS was scheduled to launch a lucrative IPO that would cement its status as one of the market's big boys. One computer glitch later, BATS' share price plummeted to a few pennies, and the company's IPO lay in ruins. Here, a guide to BATS' "spectacularly botched" stock offering: 

First off: What exactly is BATS?
BATS stands for Better Alternative Trading System, and is one of dozens of new stock exchanges that have materialized in recent years to compete with the NYSE and Nasdaq. Unlike those dinosaurs, which are characterized by scenes of traders yelling at each other and frantically scribbling on bits of paper, all the trades on BATS are conducted electronically.

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What happened to the IPO?
BATS launched its IPO on its own exchange, and almost immediately realized something was very, very wrong. All the stocks with symbols between A and BFZZZ, including its own, stopped trading, causing their prices to nosedive. The stock for Apple was one of the hardest hit, falling nearly 10 percent in a matter of minutes. The plunge affected Apple's value on all exchanges, triggering a failsafe device that suspended trading of the stock. BATS' own stock, expected to debut at $16 a share, fell to near zero and was yanked from the exchange. 

And it was all caused by a computer glitch?
Yes. The problem, allegedly triggered by a "software bug," was resolved in a matter of hours.

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What about all those bad trades?
The erroneous trades for Apple were cancelled as if they had never happened. As for BATS, it considered relaunching its own IPO, but the damage was already done. "The spectacular trading glitch sparked fears and set tongues wagging on Wall Street," says Reuters, and BATS was concerned that its share price would fall far below $16 if it tried again. The IPO was postponed indefinitely.

Just how devastating is this for BATS?
"In the annals of business screw-ups, BATS has certainly made its mark," says Brian Bremmer at Bloomberg Businessweek. Investors in BATS, as well as the IPO's underwriters, saw expected earnings and fees evaporate. "We feel absolutely terrible about letting our customers down," said BATS chief executive Joe Ratterman. And "the fact that our own stock was out there to be traded for the first time, and we showed system problems, eroded customer confidence." BATS founder Dave Cummings demanded that all the executives at BATS forego their bonuses.

Are there broader concerns?
Yes. Critics of BATS and other electronic exchanges say computer glitches can lead to a rapid cascade of errors that result in precipitous dives and market turmoil. The most widely known precedent is the "flash crash" of 2010, when stock indexes tumbled because of a computer error. While human traders are slower, BATS' debacle shows "that you still need boots on the ground," Walter Hellwig, a prominent investor, tells Bloomberg. "The fact that it was corrected quickly helped. But the fact that it happened at all makes people just stand back."

Sources: Bloomberg Businessweek, Bloomberg NewsCNNThe New York Times, ReutersThe Wall Street Journal

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