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BATS Sheds Light on Software Glitch that Scuttled IPO

According to BATS COO, Chris Isaacson, the electronic exchange operator successfully completed the IPO auction, but had a problem transitioning to continuous trading.

A software bug that led BATS Global Markets to pull the plug on its own initial public offering last week puzzled Wall Street, since the electronic exchange operator has had reputation for high reliability and efficiency.

In an interview with Wall Street & Technology, Chief Operating Officer Chris Isaacson shed more light on the unexpected turn of events, and what steps BATS took to address the problem.

Even though BATS, based in Kansas City, Missouri, spent months on internal testing and weeks of dedicated testing with its customers using test symbols, the technical glitch related to IPO auction software, was not previously detected. “There was a unique scenario of different option/order types. We conducted the auction successfully but we had trouble transitioning from the auction to continuous trading and that is where the bug was exposed,” said Isaacson.

As reported by BATS in a post-mortem, at 10:45 am last Friday, a single matching engine for BYX—which is BATS’ main exchange — handling symbol A-BFZZZ encountered a software bug. BATS splits up the alphabet in 12 ways for scalability so the BATS symbol for the IPO was on the same matching engine for stocks with symbols A-BFZZ, explained Isaacson. Therefore, quotes and orders for symbols on the same matching engine including Apple Inc., were inaccessible, he said. These quotes were no longer updated. “We knew there was an issue immediately on BZX after the auction was supposed to print on the consolidated tape.”

In addition, BATS’s second exchange platform, BYX was continuing to witness crossed markets — when the national best bid is greater than the national best offer— from stale quotes in Nasdaq UTP symbols on the BZX exchange. Both BZX and BYZ have an order routing relationship. If an order cannot be entirely filled on BYX, then it can be routed to BZX. “That is why BYX declared self-help against BZX,” said Isaacson.

BATS immediately contacted the Consolidated Tape Association (CTA) requesting that all quotes from that affected range be removed from the consolidated tape.

In order to fix the problem, BATs needed to shut down the matching engine and restart it, said Isaacson. Once they restarted the matching engine, any orders that were previously live, were canceled back to customers.

Within two hours, the technical problem was corrected but BATS had taken a hit to its reputation. “By 12:50 pm on Friday, we had recompiled, tested and deployed that in real time to our production environment,” said Isaacson.

While BATS had planned to reopen the BATS symbol at 1:15 pm with a five-minute quoting period, the erroneous code sent BATS’ own newly issued shares down more than 90 percent at one point, and rattled the shares of Apple Inc., which plummeted nine percent. “We made the decision in the best interest of shareholders and the public that it was best to withdraw our IPO,” said Isaacson.

Going forward, BATS is considering its next steps. “We’re looking at starting another comprehensive testing process to ensure this does not recur,” said the COO. According to Isaacson, BATS still plans to move forward with its IPO business.

In the meantime, the electronic exchange operator, which holds 10.3 percent share of U.S. equities and 25.4 percent of European shares, said Isaacson, is thankful for its customers’ support. “We have had a reliable track record for the past three years, 99.99 percent uptime. Clearly, we failed an important test in the market on Friday,” said Isaacson, adding, “We’re humbled and ready to move on and address any issues.”

Ivy is Editor-at-Large for Advanced Trading and Wall Street & Technology. Ivy is responsible for writing in-depth feature articles, daily blogs and news articles with a focus on automated trading in the capital markets. As an industry expert, Ivy has reported on a myriad ... View Full Bio

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