It is no secret that the cost of doing business in the United States is higher as a result of disclosure obligations and liability threats that stem from public company status. Accordingly, the decision about pursuing an initial public offering is one that companies do not often take lightly. The omnipresent threat of suit under the federal securities laws is a strong motivator for companies to take all possible steps to avoid any actions that could result in ruinous antifraud liability. On March 23, a rare event occurred that highlights the drastic step that one corporation took to avoid being subjected to suit. BATS Global Markets Inc. withdrew its initial public offering partly to avoid liability as a result of the precipitous decline in its trading price shortly after trading in the stock commenced. Joe Ratterman, BATS’ CEO, stated that he does not expect legal problems because no BATS shares or money actually changed hands on Friday. Because the auction trades were broken, “no investors will be out,” he said.
BATS, the third-largest U.S. stock exchange, was hoping to take on the more recognizable NYSE and Nasdaq and become a major player in the exchange industry. The software error that derailed the initial public offering of BATS, where 11 percent of all U.S. stock trading occurs, rattled investors concerned about the growing complexity of financial markets. Some traders and industry insiders said the fiasco raises questions about BATS’ larger business model. “It creates considerable uncertainty about the company’s trading platform,” said Francis Gaskins, president of IPOdesktop.com of Marina del Rey, CA, which does research on IPOs.
The problems BATS faced with its recent IPO raised similar concerns that stem back to the May 6, 2010 “Flash Crash.” Electronic trading has had an enormous impact on the global financial markets, though the potential for breakdown remains, as highlighted by the Flash Crash and the BATS IPO. Such electronic trading, whether or not on BATS, has no doubt increased both the efficiency and the complexity of the inner-workings of the global financial system and carries with it the potential for benefit and disaster.
Bringing the matter full circle is the potential for BATS’ system to facilitate high-frequency trading (HFT). HFT, made possible by the rise in electronic trading and thought to be a major cause of the Flash Crash, is also pegged as a possible cause of the BATS meltdown. HFT also carries the potential for abuse by technologically savvy parties. Ironically, on March 23 (the same day as the BATS fiasco) the SEC revealed that is also looking at whether some HFT firms have used their close links to computerized stock exchanges (such as BATS) to gain an unfair advantage over other investors. Investor confidence is vital to the efficiency of the public securities markets and these recent developments, related to both faulty electronic trading as well as the potential for abuse through HFT, will need to be closely monitored to ensure a level playing field for the broader investing public.