A Safe Pair of Hands

You can't help but feel a little bit sorry for Joe Ratterman, CEO of the beleaguered BATS exchange. Hot on the heels of its botched initial public offering (IPO), on its own system, the exchange has had to admit that it hasn't always been offering execution at the best available price.

Bats, which stands for Better Alternative Trading Systems, also admitted that these system issues had potentially been going on for years, undetected, and customers had almost certainly lost money due to them. The main issue was a technical one, which meant that transactions had been completing away from the National Best Bid and Offer (NBBO). NBBO rules state that transactions must always execute at the best bid and ask price across any exchange in the US, with both brokers and exchanges obligated to comply.

Direct Edge also announced its own set of glitches. The first had been going on since 2011, while the second, more serious, had also been occurring for years. Then, the New York Stock Exchange announced its own technical issue which meant prices had been executing away from the NBBO, although this was by far the most minor fault, lasting for four minutes last week.

It's all gone a bit Pete Tong for US bourses, essentially. As my colleague Steve Dew-Jones reported last week, although the actual amount of money lost by participants through the latest problem with BATS isn't dramatic, relatively, it's yet another reputational sideswipe that the venue can ill-afford. Likewise, for a small exchange, again relatively speaking, such as Direct Edge, it's hardly a great advertisement to increase order flow.

More staggering is that these issues have been going on for so long without being detected. In NYSE's case at least, without defending it, the error only lasted for four minutes before being picked up. How this could potentially have been occurring for so many years at the other two, without anybody noticing, beggars belief.

The exchange business, like it or not, is an electronic one now, digitalized, decimalized and mechanized. Gone are the days when prices were haggled and shouted on the floor at Broad Street as a primary form of negotiation. Trades are executed through fiber optic cords now rather than vocal chords, and information is transmitted at light speed through telephone wires, rather than couriered to Midtown by a teenager on a bicycle. It adds fire to the Luddite bonfire when issues such as this occur with the alarming frequency that they seem to.