Del Boy at the Speed of Light

How BATS was hoisted with its own petard.

In case you don’t know, a “petard” was a small bomb used for blowing-up fortifications. Sometimes they went off prematurely, injuring the person setting the charge and “hoisting” them into the air. BATS Global Markets, the company that brought the world the delights of super-fast electronic stock trading 6 years ago has just tried to be the first company to list its stock on its own exchange in an Initial Public Offering. Guess what happened? The same technology that has, so easily, allowed the company to demolish its competition blew up in its face.

When BATS launched trading in 2006 it quickly became the third-largest US equities market by volume. It grabbed 10 per cent of the US market in two years. It operates two US stock exchanges, a European exchange, BATS Europe, which processes 6 per cent of that market, and a US options exchange. BATS is a second generation electronic communications network founded in June 2005 by David Cummings, owner of Tradebot Systems in Kansas City.

BATS stands for Better Alternative Trading Systems. The BATS electronic network is designed to “handle high-speed, high-volume, anonymous, algorithmic trading”. When it launched, it was a revolutionary technology that precipitated a massive change in both US and global market behaviour, not all of it good. Many people were, and still are, concerned about the fallibility of such automatic trading and the unexpected consequences that result when we allow the “anonymous” machines to play mathematical games with themselves, such as in the “flash crash” of 2010.

In its prospectus for the IPO, BATS Global Markets boasted an “up-time” of 99.94 per cent in each of the past three years, so to have to abandon the IPO for “technical reasons” is a wonderfully ironic indictment of today’s automated financial markets. Surely, not even Del Boy can think clearly at the speed of light.

BATS is a dominant player so while this very public failure will dent its reputation and provide more ammunition for its detractors it is unlikely to stop its IPO, just delay it a little. Although it may be symbolic of the end of an era of easier growth, as the competition bites back. The IPO wasn’t intended to raise much cash: the company has plenty already. The main beneficiaries would have been the creditors of the now defunct investment bank Lehman Brothers (who would have thought that those six words would ever follow each other in a sentence?) that was going to be one of the main sellers of BATS stock.

Once upon a time buying and selling stuff was a much simpler and more transparent proposition – in true Del Boy style. Haven’t market traders come a long way since? But I wonder if the financial mess we now find ourselves in is telling us we should worry far more about this sort of market opacity than we do? I can’t help thinking of the irrepressible Del Boy at his finest, when, at last, he made it after all those years of trying, only for it to go sour.

Del Boy: Don’t worry, Rodney. This time next year, we’ll be millionaires!

Rodney: This time last WEEK we were millionaires!

Mark

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