It will not come as a surprise to too many Zero Hedge readers but we feel a big told-you-so dance coming on again. Via BATS:
- *BATS SAYS 'SYSTEM ISSUE' CAUSED PRICING PROBLEMS OVER 4 YRS:WSJ
- BZX Exchange (10/24/08 - 01/04/13) Average Daily Incidents: 410.1 Total Incidents: 433,039
In simple terms BATS admits that the Reg NMS trading principle of NBBO (National Best Bid or Offer) has failed; meaning the core premise of market structure since 2005 has been massively abused by at least one and likely all exchanges. The bottom-line is that the primary and really only safeguard in the market when HFT was unleashed was never operational and the SEC has had i) no actual supervision over who or what was abusing the NBBO and ii) no way of keeping track of what really happens in the market.
Please be advised that BATS has determined that upon an NBBO update on BATS' BYX Exchange, BZX Exchange and BATS Options, there are certain cases where the Matching Engine will allow for a trade through or an execution of a short sale order at a price that is equal to or less than the NBB when a short sale circuit breaker is in effect under Regulation SHO. These cases result from the sequencing of certain required events in the Matching Engine related to re-pricing and sliding orders in response to the NBBO update.
In the first case, a visible order that is posted and has been price slid can execute at a price that trades through another market center's protected quote if that away market center locks the displayed price of the BATS order and then BATS receives another order that crosses the working price of the resting order.
In the second case, the system was programmed to allow non-displayed peg orders to re-price in response to a change in the NBBO prior to sliding previously booked contra-side hidden orders that now cross an away market center. As a result, it is possible that in response to a change in the NBBO, the price of a resting hidden order could be crossing the NBBO momentarily and an execution could occur at that crossing price against a peg order that is re-priced in response to the NBBO change, resulting in a trade through. This particular issue can also result in a short sale order executing at a price that is equal to or less than the NBB while a Regulation SHO circuit breaker is in effect.
These system compliance issues have resulted in the following incidents:
(02/26/10 - 01/04/13)
Average Daily Incidents: 1.4
Total Incidents: 617
(10/15/10 - 01/04/13)
Average Daily Incidents: 14.4
Total Incidents: 7,884
(10/24/08 - 01/04/13)
Average Daily Incidents: 410.1
Total Incidents: 433,039
Regulation SHO Incidents
(02/28/11 - 01/04/13)
Total Incidents: 174
(02/28/11 - 01/04/13)
Total Incidents: 3,489
BATS plans to deploy a permanent change to correct the second case on or about January 18, 2013 and the first case on or about January 25, 2013. Correction of the first case must be preceded by a rule filing with the SEC.
Please contact the BATS Trade Desk or your Director of Sales with any questions.
BATS Trade Desk