BATS IPO: Accidental Death or Murder?

The IPO's collapse was a major setback for Lenexa, Kansas- based BATS, which was looking to raise about $100 million from the offering. "Although our affected market has reopened, in the wake of today's technical issues, which affected the trading of certain stocks, including that of BATS, we believe withdrawing the IPO is the appropriate action to take for our company and our shareholders," BATS Chief Executive Joe Ratterman said in a statement the day of the collapse.

A spokesman for BATS and Nasdaq declined to comment for this story.

Hunsader argues that the nature of the trades hitting the BATS shares are evidence that the exchange was the target of a Wall Street dirty trick from a computer algorithm.

"If you look at [the trades], it was perfectly logarithmic, so the bids must have been generated by an automated quoter. This algorithm went to work hitting those bids more than 500 times -- all the way to 0.0002 in a perfect mathematical relationship in the space of 900 milliseconds," Hunsader says. "Plus, It wasn't reacting to anything like rival bids. It was the only thing executing at the time."

Key to the BATS conspiracy theory is the collapse in its IPO price -- from $16 down to pennies -- during the first hours of trading on the shares.

Traditionally, the Wall Street banks running the IPO determine the price and traders set up so-called electronic "layer quotes," which are orders that will execute within an expected range to gobble up the shares. If the BATS IPO was priced at $16, an algorithm would be programmed to buy shares at different layers "away" from that price.

For example, an algorithm would execute an order to buy 100,000 shares of BATS if its price hits $13, and then 50,000 if it becomes more expensive at $15.

But there would be no logical reason for a buyer to send a bid at the rock-bottom level seen in the BATS IPO, says Howard Tai, a senior analyst with market consulting firm AITE Group.

"I am going to take the high road and say that anybody in his right mind -- even a programmer -- would not have written logic like that. And if they did, that programmer should lose his job," Tai says. "You have to use everyday common sense and market experience in writing code."

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