HFT Gameplaying Derails BATS IPO Post-Hoc

Mar.26.12 | About: BATS Global (BATS)

Why was this crap allowed to go on again?

The potential for “uncoordinated and chaotic” trading after bad code corrupted its computers spurred Bats Global Markets Inc. (BATS:BATS), the third-biggest U.S. stock exchange operator, to scuttle its initial public offering, according to the company’s chief executive officer.

Potential? Are you smoking something dear Sir?

I ask because there was nothing "potential" about the halt in Apple that came from your exchange, nor in your own firm's trading for the short period it was available. None of that looks like "potential" but rather it appears to be realized risk.

There is no chart available for the BATS trades, but they were truly wild, with some going off at a literal near-zero. The stock was subsequently halted and never resumed, and now with the IPO retracted it won't be.

The real and unanwered question is why we permit this sort of banditry in the first place. HFT is an abomination -- the claim is that it provides "liquidity" but I assert there is no such benefit at all. Volume is not the same thing as liquidity -- if you and I pass 1,000 shares back and forth a dozen times there is not 12,000 shares of liquidity in the system -- there is only 1,000. All we've managed to do via such an exercise is try to sucker someone into paying more (or less) than we did so we can unload the bag in the direction of movement before the hand goes up and someone says "uh, what sort of three-card monte are you running here?"

I suppose one can argue that advantages gained by being "first" are ok, but they don't translate into confidence in the markets. Rather, they translate into beliefs that the common man is being hoodwinked and scammed, never a good perspective for the market to imbue into the common investor. But that's what we've done.

Nanex has lead the charge on exposing the manipulated nature of the markets under the onslaught of this arms race. They capture a lot of data, including that of the "nice" trading on BATS stock itself on the 23rd.

(Click to enlarge)Click to enlarge

That's very nice. Less than one second after the stock opened for trading the price had fallen to 28.48 cents from the opening print of $15.25. Within 1.5 seconds it "sold" for 2/100ths of a cent, and 567 trades were executed before trading was halted, never to resume.

BATS claimed that there was some sort of software glitch that was active just that day. But Nanex reports that AAPL had an identical incident on the BATS exchange (crossed market caused by an executed trade off a stuck quote) three days earlier.

The amount of money that can be grabbed by less-than-scrupulous people using HFT algorithms that "notice" things such as this -- occurrences that you'll never notice with the naked eye but computers are very good at spotting -- is enormous.

The question is why regulators and the public continue to tolerate these obvious "erroneous" events. There's always a loser for every winner in trades, and when you manage to exploit an anomaly like this a real person gets skinned while you make off with the loot.

We can argue over whether such activity is or should be legal all we want, but what can't be argued is that this sort of activity is consistent with the claims of an orderly and fair marketplace -- it is not.