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BATS IPO Canceled in Share Crash

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Trading issues on its filing and other irregularities, like an Apple fall, were first notified by BATS at 10:48:41 eastern time. "Please be advised that BATS is currently investigating system issues trading in symbols range A through BF. Will advise," the alert said.

In early Friday, trading Apple shares were briefly halted because of the BATS snafu, but closed at $596.05, a fall of less than 1% on the day. A trade of 100 shares on BATS exchanges caused Apple's stock to fall nearly 10% to $542.80. Those trades were canceled, BATS said in a statement that called the trades "erroneous."

"As a result of this systems issue, three erroneous trades occurred on the BATS BYX Exchange in Apple Inc. (APPL), one of which caused a volatility halt in that stock," the company said in a statement. "The erroneous trades were broken under BATS' clearly erroneous trade policy."

To be seen is if BATS will attempt a re-listing on stock markets and whether it would try to do so on its exchange. "It's unfortunate that on the day you want to shine the brightest, you fall flat on your face," said Mike Shea, a managing partner at Direct Access Partners prior to the company's IPO withdrawal. "This is not some game changing event."

"Making Markets Better," as BATS' slogan goes, or making markets better? BATS daylong saga may revive a larger debate into the risks of high-speed trading as regulators piece together the company's disastrous Friday.

BATS operates two stock exchanges in the U.S., the BZX Exchange and the BYX Exchange, which currently account for about 11% to 12% of all U.S. equity trading, according to the company's Web site. The site showed that at 10:45:26 a.m. New York time, 10 orders of BATS shares were traded at a price of $15.25.

"The IPO auction execution for symbol BATS has been printed on Tape B at a price of $15.25 with a size of 1,199,652. The symbol BATS will be halted until further notice," Bats said in a 11:53 a.m. ET alert. After alerting traders that its own shares would resume trading at 1:20 p.m ET, Bats said that shares would continue to be delayed. "We will advise on further updates," said Bats in a 1:03 p.m ET alert. Near the close of trading, the company pulled its IPO entirely, but said that all trading issues had been resolved.

Overall, BATS is the third leading U.S. stock exchange by volume, surpassed only by the New York Stock Exchange (NYX) and the Nasdaq (NDAQ). The company -- who's name stands for "Better Alternative Trading System" -- was founded in 2005 to take on the dominance of those exchanges and an overall consolidation in the industry.

As a competitor that caters to high frequency traders, BATS earned nearly $1 billion in 2011 revenue and turned a profit of $23.6 million, according to its year-end financial statements. In November, the company completed an acquisition of London-based electronic exchange Chi-X for $330 million. Both companies earn revenue by executing trades on their exchanges and providing market data.

Two years ago, the Dow Jones Industrial Average fell over 700 points on what's been called the May 6 "Flash Crash." During that episode, traders said bursts of giant stock orders flooded high-speed equity trading markets, a new type of computerized stock trading that have become a bigger part of overall market volumes.

Nearly $1 trillion in U.S. stock market value was shed over the 20 minute crash, which prompted the shares of some companies like Procter & Gamble (PG) and Accenture (ACN) to fall as low as a penny and others to rise to $100,000.

After the crash a Securities and Exchange Commission and Commodity Futures Trading Commission investigation found that a large, but valid algorithmic trade of $4.1 billion sale in futures contracts tied to the S&P 500 had precipitated the market malfunction. In response, the regulators launched circuit breakers for single stock and index product trading. Those circuit breakers were triggered in the halting of Apple's shares on Friday and in various other "mini flash crashes."

The Wall Street Journal reports that the SEC also has opened an investigation into whether the market drop was precipitated by traders' use of cancelled trades called "quote stuffing," in addition to other practices. That inquiry may extend to Friday trading glitches at BATS, the Journal reported.

In February, BATS disclosed that it had received a written request from the SEC's enforcement division "related to the development, modification and use of order types, and our communications with certain market participants," the company said in a filing.

The exchange's largest investors are private trading firm Getco and investment banks like Citigroup (C), Morgan Stanley (MS), Credit Suisse (CS) and Bank of America (BAC). Those banks, in addition to Deutsche Bank (DB), Sandler O'Neill, Wedbush Securities, Raymond James, Rosenblatt Securities and Nomura were to be lead and co-managers of BATS' initial public offering; however, BATS said the underwriting agreement was canceled on Friday.

The Lehman Brothers estate and electronic exchange Getco were expected to be among the biggest sellers of BATS shares in the offering, according to the company's IPO filing.

-- Written by Antoine Gara in New York

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