BATS Exchange IPO Off To Rough Start On Debut

Shares of BATS Global Markets Inc. (BATS), the third largest stock exchange company in the U.S., got off to a rocky start on their first day of public trading Friday, as the IPO was halted following erroneous trades on Nasdaq and technical snafus on BATS's own exchange affected Apple Inc. (AAPL) stock.

BATS, which priced 6.3 million shares Thursday night at $16, the low end of its expected range of $16 to $18, was halted by Nasdaq for "clearly erroneous" trades after it opened.

At the same time, shares of Apple were halted for five minutes after erroneous trades were made on BATS's exchange. According to FactSet, orders placed through the BATS Global Markets came in well below where Apple had previously been trading.

BATS issued an alert on its website that it was "actively investigating an issue." The exchange issued an alert at 10:48 a.m. EDT that there were "system issues in symbols range A through BF." At 11:53 a.m., BATS updated its website, saying those issues have been resolved.

The trading problems come the same day that a Wall Street Journal report was published about a regulatory probe into high-speed trading on computerized exchanges like BATS.

Since BATS was formed in 2005 by trading firms and Wall Street banks to challenge the New York Stock Exchange and Nasdaq, the Lenexa, Kan.-based company has launched two U.S. stock exchanges, an options platform and now lists some exchange-traded funds. In U.S. share trading, BATS ranks third behind NYSE Euronext (NYX) and Nasdaq OMX (NDAQ).

BATS, which employs about 150 people, also runs the largest pan-European stock market by value of stocks traded following its acquisition last year of rival platform Chi-X Europe, and separately is weighing a move into Brazil.

BATS derives its fees from trading activity, both in terms of executing market transactions and market data. Volatility generally helps drive trading activity, although the spike that occurred in August rattled investors' confidence, and since then stock and option volumes have declined. Right now, volumes remain light, though there have been signs in recent weeks that investors have begun returning to mutual funds focused on U.S. stocks, which is a potentially positive signal for exchanges and brokers.

BATS's total revenue in 2011 rose 11% from a year earlier to $927 million; net income increased 18.7% to $23.5 million. BATS's acquisition of Chi-X was seen weighing on the company's overall profitability. The roughly $330 million deal closed Nov. 30, 2011, and had BATS owned the all-electronic market for the full year, its net income would have been $13.1 million, according to estimates BATS provided to regulators.

London-based Chi-X Europe, now being integrated into BATS's European operations, lost $9.4 million last year as $72.8 million in trading fee revenue was eaten up by payouts to traders doing business on the platform and operating expenses.

All the shares in BATS's IPO are being sold by prior owners, so none of the proceeds will go into the company's coffers. Sellers include Lehman Brothers Holdings Inc., which wants to sell 3 million shares, and Getco Strategic Investments LLC, a unit of Chicago-based trading house Getco LLC, which is scheduled to sell 1.1 million shares.

The BATS IPO comes as the Securities and Exchange Commission is examining whether some rapid-fire trading firms such as Getco and Tradebot Systems Inc., another BATS investor, have used their close links to computerized stock exchanges like BATS to gain an unfair advantage over other investors. The wide-ranging probe, which was detailed in a front-page article Friday in the Wall Street Journal, is examining a number of electronic exchanges. The probe is at an early stage and there is no suggestion of wrongdoing by trading firms and exchanges.

The SEC probe stems partly from a broad look at computer trading that regulators initiated after the "flash crash" in May 2010, when stocks fell and rebounded sharply within minutes, following glitches in computer-trading systems.

The outlines of the probe were disclosed in a February regulatory filing by BATS related to its IPO. BATS said in the filing it received a request from the SEC for information related to communications with "certain market participants" and "certain of our members affiliated with certain of our stockholders and directors."

-By Lynn Cowan, Steven Russolillo and David Benoit, Dow Jones Newswires; 202-257-2740; [e-mail]