US venue operator BATS Global Markets is assessing compensation options after identifying issues with its matching system that caused almost 450,000 trades to be executed at prices that breached securities regulations.
The errors affected short-sale executions and non-displayed pegged orders from 24 October 2008 through 4 January 2013, affecting a total of 445,203 trades worth US$420,360.57, according to a notice on BATS' website.
"We have rules that govern the mechanism for compensating members when we have systems issues," read a statement from BATS. "We will explore with the SEC the extent to which we can provide compensation retroactively regarding this issue."
The exchange group found that some short-sale orders were executed at a price that is equal to or less than the national best bid or offer, while non-displayed pegged orders may not have been executed at the most optimal price.
The short-sale issue affected the market operator's BYZ and BYX equity markets, while the non-displayed pegged order issue affected BATS Options, as well as the two stock exchanges. BATS plans to fix both issues before the end of this month, with the trade through issue requiring the firm to lodge a rule filing with the Securities and Exchange Commission (SEC).
Under the SEC's Reg NMS rules, trades must be routed to the market displaying the best price. As per short-selling rules, if a stock declines by 10% from the previous day's close, traders can only sell short at a price one tick above the national best bid or offer until the end of the next trading day.
While stating that the number of trades impacted by the error accounting for just 0.04% of total trading in the affected period, Chris Isaacson, chief operating officer for BATS, said the incident was further evidence of the need for thorough oversight of the technology that underpins US equity markets.
"We operate in a complex market structure and these incidents highlight the need for continued diligence on testing, verification and surveillance of the various order types," Isaacson told theTRADEnews.com. "We would be open to a wholesome review of market structure."
The latest incident is part of a long line of issues that have plagued US exchanges in recent times. Last May, BATS was forced to cancel the IPO of its own company on BZX's brand new listings service after a software error affected its IPO auction process.