Hundreds of thousands of transactions over the past four years on the BATS Global Markets stock exchange were affected by a “system issue” allowing trades potentially in violation of securities rules, the operator announced recently. The error is the latest in a string of technical problems affecting financial markets in recent months.
In a notice sent to BATS customers, the operator explained that the glitch in its trading system allowed some orders to go through at prices lower than the national best bid and offer price. This error is in violation of Securities and Exchange Commission (SEC) regulations, which require orders to go to the best bid in the market. Additional problems occurred with short selling transactions, in which investors bet on a stock’s price falling by borrowing shares to sell and later buying the stock back to repay the loan, a practice that is limited by the SEC.
In total, there were 445,203 incidents, dating back to October 24, 2008, BATS said. According to a BATS spokesman, the net amount of “inferior prices” received as a result of errors was less than $500,000, the Wall Street Journal reported. The exchange discovered the problem itself and had not received any customer complaints. Nonetheless, the incident may contribute to ongoing investor concern surrounding the technology governing stock exchanges.
“This shows that complexity in the market has gone way too far,” Joe Saluzzi, co-founder of New Jersey brokerage Themis Trading, told the Wall Street Journal. “Investors are worried because they don’t know what else is lurking at these exchanges.”
A continual challenge
These reported system issues come on the heels of a number of other problems with trading software. In March 2012, BATS withdrew its own initial public offering due to a software glitch that drove shares down to a fraction of a cent within seconds. Industry onlookers have expressed concern, with Traders Magazine designating 2012 the “Year of the Glitch.”
“The problem has come to a head,” Traders’ Peter Chapman wrote. “Industry players and Washington regulators are calling for change. They blame scant testing, poor monitoring and lack of accountability for the problems.”
Such errors pose a particular challenge to regulatory compliance, the Wall Street Journal noted. For instance,Nasdaq announced in August that staff had accidentally deactivated software intended to prevent trades from violating SEC rules on short selling. Exchanges and other trading bodies can strengthen their system coding processes with tools such as source code analysis to limit investor concerns and avoid potential regulatory violations.
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