April 04, 2012

In the week since a software glitch disrupted the initial public offering of BATS Global Markets, some experts have focused their attention on the idea that a rogue algorithm deliberately continued to sell BATS shares on a rival stock exchange.

According to research by Nanex, a provider of a streaming whole market data feed, an algorithm executed 567 trades on the Nasdaq Stock Market and pushed the price of BATS from $15.25 down to a few pennies -- all within 900 milliseconds, or less than one second.

The theory of a malicious attack by a Nasdaq algorithm to take down its rival stock exchange was circulated by the finance blog ZeroHedge. The blog cites research from Nanex, the Winnetka-Ill., based firm, which posted online a spreadsheet showing all the bids and offers in BATS shares from Nasdaq.

According to Nanex CEO Eric Hunsader, Nanex was able to identify the algo executing on Nasdaq because a lot of the noise was taken out of the market, since none of the other venues were quoting or trading the stock. However, according to an entry in Nanex's blog, Zero Hedge is incorrect in saying this was a Nasdaq algo. All that is known is that the algo executed on Nasdaq, but the ownership of the algo has not been disclosed to the public.

"Nasdaq was the only exchange out there in these few seconds of time that is quoting and trading the stock," said Hunsader. "This is completely out of BATS control and has nothing to do with BATS' software," says Hunsader.

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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 ...