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BATS Hits the Rocks, Which May Help Fill Its Sails

Despite weeks of daily tests to the ensure company’s systems could handle its own Initial Public Offering, BATS Global Markets promptly noticed that they had a problem last Friday.

BATS Hits the Rocks 03-29-12-A“Staff members were quickly dispatched to diagnose and fix the software problem, and within minutes the company had called the SEC to alert the agency,” The New York TimesDealBook reported. The problem was a “software bug” that blocked orders to buy the stock, according to BATS. Meanwhile, mounting orders to sell pulled the share price below a penny.

BATS aborted its IPO, retreating from the public rocks back to the starting blocks. And all this occurred on the same day The Wall Street Journal prominently featured BATS in its front-page story about an SEC probe into high-frequency trading.

Rocky Road

“It’s obviously a problem for an exchange to have that sort of issue hit them [on] their first IPO ever,” WSJ’s Jacob Bunge said in an interview Wednesday. BATS’ directors voted Tuesday to oust their chairman, Joe Ratterman, but keep him on as CEO.

The company’s rough patch is indicative of the economic recovery as a whole, which hasn’t exactly enjoyed smooth sailing. Some likened Friday’s incident to the May 2010 “flash crash,” in which a trading algorithm run amok slashed 700 points from the Dow Jones Industrial Average in mere minutes.

But others noted that circuit breakers worked as intended last week, averting catastrophe by halting BATS trading and annulling bogus trades. In fact, last week’s drama could further strengthen the SEC’s case for its “Limit Up-Limit Down” program, the proposed successor to circuit breakers, a commission pilot program due to expire this year.

For now, the folks at BATS will be working out the bugs. But a little more work is often necessary before many see the value in something.

That’s what regulators had to do with circuit breakers. And so did early adopters of Complex Event Processing (CEP) technology.

Solid as a Rock

“CEP technology is about to move from the backwaters of data management technology to center stage,” blogger Wayne Eckerson wrote in business intelligence site BeyeNETWORK on Monday.

BATS Hits the Rocks 03-29-12-BEckerson traced the history of CEP software from its days as a playground for academics in the 1990s to building complex notification systems handling high-volume data streams today. Financial services firms commonly employ CEP to detect fraud, spot anomalies and issue alerts.

“But, in reality, CEP offers more value than just pure notification,” Eckerson said. “In fact, in the age of Big Data, other use cases may come to the forefront and even give Hadoop a run for its money.”

Eckerson went on to list CEP technology’s four use cases, straight from the playbook of Neil McGovern, Sybase’s senior director of marketing and my fellow Trading & Risk Technology blogger. They are (1) Situational Detection, (2) Automated Response, (3) Stream Transformation and (4) Continuous Intelligence.

Rocking the Boat

Similar to CEP, analytics is also undergoing a renaissance, according to Sybase CTO Irfan Khan. It is still the domain of “data geeks” whose mathematical predictions track everything from national political elections to championship sports, but those dweebs are bringing analytics to the masses.

BATS Hits the Rocks 03-29-12-C“I am rather partial to the data geeks who, increasingly, are helping democratize the use of analytics in daily life,” Khan wrote in his Irfan’s View blog Tuesday. “By exposing the average citizen to the value of analytics, these data geeks are not just improving the public’s understanding of their world, they are fostering an interest in the field at a time when we need more analytics experts.”

So BATS’ rocky start isn’t the end of the world — not for BATS, and not for high-frequency trading. The world is changing, which drives evolution of regulations from circuit breakers to “Limit Up-Limit Down.” And it drives new adoption of older concepts, such as CEP and analytics.

“There’s no going back to the horse-and-buggy days of yesteryear,” as Georgetown University professor James J. Angel told Dealbook.

Indeed there is not. So here’s to rocky starts!

Related Articles:

BATS Trading Error Bolsters Case for Curbs by Michael J. de la Merced and Ben Protess

BATS Chairman Will Give Up Post by Jacob Bunge and Scott Patterson

Contemplating Alternate Realities While Paddling on (IBM) Streams by Wayne Eckerson

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2 Comments

  1. [...] BATS Hits the Rocks, Which May Help Fill Its Sails [...]

  2. | Innovation says:

    [...] can do all the high-frequency trading they want; you can have BATS blowing up all you want,” Ben Stein told Yahoo! Finance’s Breakout on Monday. The economist, lawyer and [...]

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