If you haven’t heard of BATS, you may be very well to question what it is. BATS has become the third largest exchange for equities in the United States, behind NASDAQ and the NYSE. While both of these exchanges as primary exchanges, BATS operates more of a back up exchange, as a place to provide additional liquidity.
In past years, a lot of these type of Electronic Communications Networks (ECNs) have been gobbled up by some the larger trading systems such as NYSE and NASDAQ. NYSE itself bought Archipelago Exchange in the mid 2000s. NASDAQ on the other hand purchased Brut and Instinet, two previous ECNs.
On Friday, there was a big fuss because BATS launched its own IPO primarily traded on its own proper exchange in order to try to bring itself business. This brought about a rare circumstance where a company’s IPO begins trading on its own exchange. Additionally, ECNs have come under criticism as a result of 2010 flash crash, which many people blame on Arca. But going back to last week, when BATS started trading, the company caused two big errors in trading.
First, Apple somehow got to be mispriced by $9.00 below its trading value. This caused a half across all exchanges in order to figure out what was going on with the stock. While this is a little crazy, it’s not uncommon for this to happen with some stocks. I have seen thinly traded stocks crash below the level of support for some exchange listed stocks to the point that it crashes below support (the price where anyone left is willing to buy the stock).
Second, BATS own stock got to be mispriced. This is a bigger deal, because there hadn’t been a stock listed primarily on the BATS exchange previously. I find this to be a problem because it questions the reputation of the BATS exchange, especially because they’re dealing with their own exchange. After the mishap, they elected to remove the IPO of BATS from the entire market, something that should have people concerned, at least in the short term.
While I think BATS will get their operations in order, it is going to serve as a black mark. Still, I don’t think that the sky is falling. As a society, a big part of our attention is going to be in finance and the continued advancement of technology in this sector. While this is a bad day for BATS, make no mistake, it shouldn’t hurt the company’s long term prospects. They’ve messed up and if history goes to show, people learn from their mistakes.
Building an order book in a stock that’s just opening is much different than doing it for stocks that have been trading already. First of all, people need to establish support and resistance (a large collection of offers [prices] where people are ready to sell stock). This is not easy because while analysts may have opinions on stocks, they have no precedent. Each one wants to see what the other will do first. One small mistake can send a stock tumbling down, and that’s what happened with BATS on Friday.