Trading Firm's IPO Fizzles in Seconds


Trading Firm IPO Fizzles in Seconds

Apple Shares Also Affected as Glitch Mars Debut of BATS Global Markets



Updated March 25, 2012 12:48 p.m. ET

The initial public offering of a computerized stock exchange turned into a major debacle on Friday as a software glitch sent its shares plunging to a fraction of a cent in a matter of seconds, leading it to scotch the IPO.

The technology problems at BATS Global Markets Inc., which also led to a suspension of trading in Apple Inc. shares for five minutes, raised questions anew across Wall Street about the stability of market-trading systems. BATS has championed electronic trading and, before Friday, was viewed as having some of the industry's most robust trading technology.

On Thursday night, BATS had priced the sale of 6.3 million of its shares at $16 apiece, for a total offering of over $100 million.

But when shares started trading on Friday morning on its own exchange, they instantly plunged and trading was halted.

Late Friday afternoon, BATS chalked up the disaster to a software bug related to IPO auctions.

Joe Ratterman, chairman and chief executive of BATS, said in a statement: "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."

A spokesman for BATS said the firm had no plans for another IPO "for the foreseeable future."

BATS's IPO troubles come as regulators are investigating whether superfast trading, computer-driven hedge funds have used close ties to exchanges—including BATS—to gain an unfair advantage over less-sophisticated investors, The Wall Street Journal reported Friday. BATS has not been accused of wrongdoing.

The cancellation of an IPO on the same day a company's shares started trading is a rare event on Wall Street. Investors and analysts recalled few other similar situations. Eagle Computer's 1983 IPO was canceled when the company's chief executive was killed in a car crash as the deal got under way. Eagle Computer refunded investors' money and later held another IPO.

The Securities and Exchange Commission said Friday it was looking at the BATS situation. "SEC staff has been and will continue to be in discussions with BATS to determine the cause and extent of the incident and steps BATS is taking to remedy the situation," an SEC spokesman said.

The day's events may rekindle questions about the reliability of the stock-market's plumbing, questions that came into sharp focus almost two years ago when the broader market plunged hundreds of points within minutes in what came to be known as the

"flash crash."

"This shows the flaws in the current market structure," said Tim Quast, managing director of ModernIR LLC, a Denver company that advises public companies on market-structure issues. It demonstrates how fragile the market structure is" and highlights how vulnerable companies and investors are to computer glitches.

BATS, which stands for Better Alternative Trading System, was launched in 2005 by Dave Cummings, a pioneer in highfrequency trading, to compete with more traditional markets such as the NYSE and Nasdaq. It was designed for speed and gained favor with sophisticated trading firms, in part because it rarely had technical glitches.

The firm accounts for about 11% of the average daily stock-trading volume in the U.S., according to investment bank Sandler

O'Neill + Partners.

The BATS shares offered in the IPO consisted of stock that some of the firm's strategic investors were seeking to unload. Those investors include high-frequency trading firm Getco LLC and the estate of Lehman Brothers Holdings Inc.

A banker at Morgan Stanley, which acted as lead underwriter along with Citigroup Inc. and Credit Suisse Group, touted the impending success of the IPO in an email Friday morning, saying that BATS had "generated significant demand."

But things quickly started to go wrong at around 10:45 a.m., just about the time of the opening auction for BATS stock. That is when all buy and sell orders are brought together at the open of trading in the stock.

Trades were executed at $15.25 a share, below the $16 IPO price, according to data posted on BATS website. The trading appeared choppy, suggesting a problem inside the BATS computer system, according to a person familiar with the matter. In addition, the trades weren't being reported to the stock market's centralized quote system, which is where most investors get their stock prices, this person said.

At 10:48 a.m., BATS announced it was "investigating system issues" that were affecting stocks whose symbols started with the letter "A" through "BF."

That included shares of Apple. Shortly after 10:57, Apple shares changed hands at $598.37 per share on BATS, according to data provider FactSet Systems. By 10:57:36, BATS showed a trade of 100 Apple shares at just $542.80 per share—a 9% decline.

Trading in Apple was halted across the entire stock market for five minutes, after which its shares immediately recovered. BATS canceled three Apple trades as erroneous. An Apple spokesman didn't comment.

By 11:55, BATS said its systems were operating normally. But it was still having problems with its own IPO.

At 11:14, trades from the opening auction of BATS shares were reported to the stock market's central tape, showing 1.2 million shares changing hands at $15.25.

Problems on Friday in BATS's computer system for IPOs affected the trading of its own stock on Nasdaq. GETTY IMAGES

Within nine-tenths of a second from that opening, BATS stock had fallen to about 28 cents, according to Nanex, a stock-market data tracker. Within 1.5 seconds, the price bottomed at $0.0002.

Trading in BATS was halted and rumors swirled across trading desks about troubles with the IPO. One Wall Street banker familiar with the deal said that when the stock didn't open for trading on schedule, some big buyers tried to sell their stock— creating pressure that threatened to torpedo the price were trading to resume.

The cancellation of the offering meant that no IPO investors were left on the hook.

Some traders and industry insiders said the fiasco raises questions about BATS.

"It creates considerable uncertainty about the company's trading platform," said Francis Gaskins, president of of

Marina del Rey, Calif., which does research on IPOs.

—Lynn Cowan, Randall Smith and Jonathan Cheng contributed to this article.