NEW YORK |
NEW YORK (Reuters) – Disagreement emerged on Sunday over the re-listing of an electronic stock exchange that suffered a high-profile crash last week, a breakdown that forced it to unwind its initial public offering of shares.
Dave Cummings, the outspoken founder and a board member of BATS Global Markets Inc, called in an open letter for the company to “develop a credible IPO plan” and “go public in the second quarter, if possible.
“This might seem tough, but I believe it is the only way to move past the issue,” Cummings wrote.
But the firm’s chief executive, Joe Ratterman, said in an interview that there were no plans to try for another IPO in the foreseeable future, declining to elaborate but noting that the company was still in a quiet period because of its recent share listing.
A long letter from Ratterman was released on Sunday, trying to explain and apologize for the software failure, but it avoided the IPO question.
“We had a technical blip,” Ratterman told Reuters. “It’s completely regrettable and very painful. And it’s our job to go back and bring back that confidence to get over this – it’s absolutely recoverable.”
Divergent views on when the IPO could be relaunched were part of the swirl of events that followed the highly unusual trading crash and withdrawal of the IPO Friday.
BATS, based in Lenexa, Kansas, operates a computer-driven exchange that trades stocks listed on other major exchanges such as the New York Stock Exchange and Nasdaq. Since its launch in 2005, it has grown to capture about 11 percent of U.S. stock trading volume and a smaller amount of options trading.
On Friday, in a closely watched event, BATS listed its own shares on its exchange. Soon after trading began, the stock plummeted from the $16 IPO price to less than a penny, a problem the company later attributed to a software bug.
The glitch also briefly halted trading of Apple Inc shares on BATS’ exchange. The erroneous trades were later voided, and the company late Friday said it would cancel the IPO, returning money to investors who had bought IPO shares.
On Sunday, securities lawyers said the decision to scuttle the IPO appeared likely to reduce the risk of the company being sued, by limiting the number of shareholders.
“My guess is that whoever was involved in calling the shots thought there would be a whole lot more litigation avoided,” said Lawrence Hamermesh, a professor at Widener University School of Law.
Among those who lost out in Friday’s episode was the preexisting group of BATS shareholders. They were to split a cash dividend of $100 million “upon the successful completion of the company’s IPO,” according to regulatory filings.
That group is mostly comprised of close associates of BATS, including company officers, directors, employees and former employees— “a tightly knit group,” Hamermesh said. Shareholders contacted on Sunday declined to comment.
Even if they wanted to file a lawsuit, the shareholders “would (be) unlikely (to) have any contractual rights” because companies typically include sweeping conditional language when they declare such a dividend, said James Cox, a professor at Duke Law School.
HIGH SPEED TRADING
The failed listing also could intensify regulatory scrutiny of alternative exchanges, including BATS, and their use in high-speed trading by hedge funds and others. BATS has not been accused of any wrongdoing.
Some in the burgeoning electronic trading community fear Friday’s debacle is likely to revive concerns that not enough has been done to limit the rise of high-frequency trading (HFT) made possible by BATS and other all-electronic venues.
Criticism of computerized trading, which peaked after the “flash crash” of May 2010, appeared to be fading following efforts by the Securities and Exchange Commission halt trading when stock prices move too quickly.
“This should embolden the anti-HFT legislative crowd, as they will now say that not only are some participants dangerous, but now they call into question the execution venues,” said Bijon Mehta, managing partner of Financial Technology Holdings.
The BATS failure also comes as equities trading as a whole is suffering a downturn in the United States. Volumes in 2011 fell about 20 percent from the previous year and commissions are in a decade-long decline. Three small equities trading firms closed their doors early this year, and equities trading departments have been among the hardest hit areas of Wall Street at larger firms.
No one has been punished for the bug, and nor is punishment likely because the crash was not deliberate, Ratterman said. He added that the board, which met on Friday, will weigh in on what to do about bonuses.
Cummings and Ratterman defended electronic trading as highly reliable. “This was a freak one-time event,” Cummings wrote. “The BATS matching engine has literally matched BILLIONS of orders without problems. However, the code to open an IPO is new.”
Ratterman said BATS exchanges have logged “99.9 percent uptime” and that the circumstances of its own listing drew greater than normal attention.
“On Friday we were under the brightest spotlight imaginable, opening our own stock on our own exchange for the first time ever,” he wrote. “It doesn’t get much more public than that.”
(Reporting by Jonathan Spicer, David Ingram and Jed Horowitz; Editing By Alwyn Scott and Daniel Magnowski)