BATS reveals NBBO pricing problems

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There's been a lot of speculation as to what market structure issues the SEC will choose to take on this year.

Some think that the SEC will have no choice but to act definitively. Others think that it will continue to take a more deliberate approach with lots of study coupled with piecemeal forays to address specific issues. Will anything change in light of the news from BATS that it has allowed more than 430,000 transactions to occur away from the NBBO since 2008? 

BATS clients lost only about $500,000 in total over the life-time of these transgressions, notes FT. But the market structure implications are huge. If exchanges cannot guarantee the NBBO, then what good is Reg NMS? This undermines the very system, and that has to be addressed.

At a minimum, this is yet another indication that software bugs remain a problem. In light of the Knight Capital fiasco that cost it $440 million in less than an hour--and ultimately force it into the arms of Getco--the Nasdaq's Facebook IPO disaster, and BATS' inability to conduct its own IPO, this may be the incident that finally prompts some sort of action.

But ensuring quality code is a tricky matter, from a regulatory perspective. You certainly don't want regulators poring over code before it is launched. I've suggested before that the industry endeavor to come with some voluntary risk-management checks in this area, as a way to solve the problem without additional regulation. That need is now heightened. But perhaps the time is ripe for more far-reaching implications that would amount to a Big Bang for the 21st century.

For more:
- here's an article from the Financial Times

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