BATS IPO: Accidental Death or Murder?
On Wall Street, the culprit could be a competitor with a $2,000 sell order over a computer network.
The failure of BATS Global Markets' initial public offering two weeks ago has brought out conspiracy theories among a community of Wall Street "algos," or algorithm-based traders, who use computer science and small, rapid-fire trading to make millions of dollars.
The theory, first cited on the industry blog Zero Hedge and later explored by industry publication Advance Trading, says small groups of buy-and-sell orders were sent over the vast network that connects U.S. stock exchanges with the intent to push prices down to harrowing levels as BATS tried to tap the public markets for the first time.
The deadly order was intentionally programmed to send out low-ball offers that would hit a so-called automated quoter running on Nasdaq to nudge the IPO into a death spiral, according to theorists.
"It was an algorithm from somebody connected through Nasdaq and the intent was to bring the price down to zero," says Eric Scott Hunsader, a software developer and president of market data-feed firm Nanex. "And it wasn't a stupid algorithm. It was something that was intent on working its magic."
Trading glitches at the high-speed electronic exchange on March 23 forced BATS to withdraw its much-anticipated IPO. The same glitch also caused a brief, but dramatic, drop in Apple's(APPL) shares.
According to published reports and BATS' own timeline, the company priced an initial public offering of 6.3 million shares at $16 on Thursday, March 22, with shares set to open on the company's own BZX Exchange the following day under the ticker "BATS." Nasdaq would also quote and trade prices on BATS shares.
On the day of the IPO, BATS shares began trading at 10:30 a.m. But at 10:45 a.m., BATS reported that it was having trouble with its IPO auction system. By 12:45 p.m., BATS had pulled its IPO.
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.