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High Frequency Trading Not To Blame For Crash: BATS

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BATS COO says high frequency trading didn't play a role in Friday's debacle.
BATS COO says high frequency trading didn't play a role in Friday's debacle.

Don't call it a flash crash.

Last Friday, when BATS, one of the country's leading venues for the controversial practice known as high frequency trading suddenly and mysteriously took a nosedive, some assumed that high-speed trading must have played a role.

Quick, sharp collapses in the stock prices of both BATS and Apple on Friday seemed to have some of the hallmarks, though on a smaller scale, of a similar event two years ago, when the Dow Jones Industrial Average dropped by about 1,000 points in a matter of minutes -- an event, later dubbed the "flash crash," that a joint report by the Securities and Exchange Commission and the Commodity Futures Trading Commission attributed in part to high frequency traders.

BATS executives argue that Friday's event was an entirely different breed of crash.

"There's no connection between the [glitch] we had and high-frequency trading," Chris Isaacson, BATS's chief operating officer, told The Huffington Post. "This was solely a technical failure," he said.

Isaacson added that it was impossible for high frequency traders to have exacerbated the problem, because the glitch happened during the process of auctioning new BATS shares following its initial public offering, when trading was not yet open to the general market.

The troubles started on Friday morning when when the stock price of Apple -- the highest-valued public company in the U.S. -- suddenly took a nosedive, losing just over nine percent of its value in about five minutes. The Apple stock tailspin coincided with a precipitous drop in the value of other stocks with ticker names in the same alphabetical neighborhood as Apple -- including shares in the BATS exchange itself, which had just made its IPO that morning. It withdrew the IPO later that day, capping a nightmare trading session for the exchange.

According to a review by BATS executives, the culprit was a computer glitch, not high-frequency trading.

But the fact that such a precipitous crash occurred on an exchange known as one of flash trading's leading home bases could nonetheless draw unwanted attention to the practice, raising even more questions about the safety and stability of electronic trading.

"The more these occurrences and anomalies happen, the more confidence is eroded," said Joseph Saluzzi, founder and partner at institutional brokerage firm Themis Trading. "People haven't gained their faith back since 2010. Retail investors and institutions don’t trust the system."

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