Market structure the big issue for 2013


The shocking news from BATS that it consummated hundreds of thousands of trades over four years at the wrong prices is still reverberating through the industry.

Indeed, the fact that 430,000 transactions could occur away from the NBBO undetected speaks to some huge market-wide issues. If exchanges cannot guarantee the NBBO, then what good is Reg NMS?

These sorts of snafus, while not financially super significant, undermine the very foundation of our system, and that has to be addressed. BATS itself seems to agree that market structure issues are at the center of this storm. The order types that produced the error at BATS are used to comply with regulations the SEC implemented in 2007 to ensure all investors get the best prices for equities, the CEO of BATS told Bloomberg, adding that simpler rules would limit such technical mishaps.

Some might quibble with that, arguing that the company is trying to excuse inexcusable behavior by blaming regulations. But with thousands of order types alive in the trading system--we've come a long way from the days of market and limit orders--he certainly seems to have a point. The market structure that we have now almost defies description.

BATS deserves credit for self-reporting its mistakes, which has to make people wonder if other exchanges have made similar NBBO-oriented mistakes. The SEC is taking a look at order types in general, and the order types involved in the BATS snafu may be part of that effort. Overall, the drum beat to broadly assess the current structure of the U.S. markets--and I'm talking about the whole ball of wax--is getting louder and more insistent. This could be the year that we get serious about it as an industry. -Jim