iWideQuote
How the BATS Market Maker Quoter halted AAPL Trading on March 23, 2012.

On March 23, 2012 trading in AAPL (Apple) was halted due to a single trade occurring far enough away from the current price to trip the single stock circuit breaker. The quote/trade that caused the halt occurred on the BAT-Y exchange. The event created quite a stir and has never been adequately explained. We hope the following article makes it crystal clear as to how and why this event occurred.

BATS has stated that this "bad quote/trade" in AAPL was related to the same system error that caused their own IPO to be obliterated that same day in just 900 milliseconds. We decided to look at the quoting patterns for AAPL on the BAT-Y exchange for three full weeks prior to the AAPL event of 03/23/2012. What we found was that quoting far away from the NBBO was frequent and common on the BAT-Y exchange. This is easily explained if the quotes in question are generated by the BATS Market Maker Quoter, the BATS version of an Automatic Market Maker. When one reads the specifications for the BATS Market Maker Quoter, it becomes painfully obvious these quote prices are correct and intentional.

By law, any order (quote) that is placed is intended to be executed on. As that is the case, the only surprise is that this type of event does not happen every single day.

The following charts plot quotes over the course of an entire trading day, in one second increments. For clarity, the charts show only quotes from the BAT-Y exchange, the National best bid and the 8% NBBO bands market maker quotes must adhere to.

The first date of 03/02/2012 is used as a reference chart:

03/02/2012
Click for larger image
  • BAT-Y Ask prices are plotted in red.
  • BAT-Y Bid prices are plotted in blue.
  • National Best Bid is plotted in green.
  • 8% Upper NBBO band is plotted in light pink.
  • 8% Lower NBBO band is plotted in light green.


Three weeks of quoting from the BAT-Y exchange prior to the bad trade/halt in AAPL - Click on any chart for a high resolution image:
03/05/2012
Click for larger image		 03/06/2012
Click for larger image		 03/07/2012
Click for larger image		 03/08/2012
Click for larger image		 03/09/2012
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03/12/2012
Click for larger image		 03/13/2012
Click for larger image		 03/14/2012
Click for larger image		 03/15/2012
Click for larger image		 03/16/2012
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03/19/2012
Click for larger image		 03/20/2012
Click for larger image		 03/21/2012
Click for larger image		 03/22/2012
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On 03/23/2012 quoting from BAT-Y on AAPL looked like any other day, with quotes frequently hitting at 8% (or greater) away from the NBBO. The only difference - a trade executed on one of these quotes:
03/23/2012 - Typical quoting in AAPL from
the BAT-Y exchange:
Click for larger image		 03/23/2012 - Tick chart drilling down to the single
trade that triggered the circuit breaker:
Click for larger image

Regardless of any system error on that day, it was simply a matter of time before one of these quotes was executed on and only a matter of time before another similar event occurs. This is the precise reason for the SECs (apparent) ban on stub quotes.


After the events on 03/23/2012, this practice stopped (almost) for one full day. It has since resumed but it appears the banding is now tighter, although still far away from the NBBO.
03/26/2012
Click for larger image		 03/27/2012
Click for larger image		 03/28/2012
Click for larger image		 03/29/2012
Click for larger image		 03/30/2012
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04/02/2012
Click for larger image		 04/03/2012
Click for larger image		 04/04/2012
Click for larger image		 04/05/2012
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Additional Notes:
  • The BATS exchange stated on their website that the trades in AAPL were due to stale quotes being delivered and that the trades were clearly erroneous. Really? You have an Automatic Market Maker generating quotes all day, every day far outside of the NBBO and it's a surprise one is executed on? Clearly erroneous? Really?

    This was also not an "isolated" one time event. On March 20, 2012 (three days prior to the halt event) three trades were executed in AAPL on the BAT-Y exchange, far away from the current price and NBBO, executing on the BAT-Y quotes:

    Click for larger image

    The only difference here is that the trades were still inside the single stock circuit breaker thresholds and therefore trading was not halted.

  • The BAT-Y exchange is notorious for this type of quoting. We chronicled this activity in an article titled 'The Legal Limit Algo' in July, 2011.

  • The quotes (orders) are generated by the BATS Market Maker Quoter (the exchanges Automatic Market Maker), which by it's own specification is intended to quote wide:



    Note that the BATS Market Maker Quoter is a replacement for the BATS Stub Quoter. See the references below for a complete specification of the BATS Market Maker Quoter.

  • As is seen from the charts above, since the event that halted AAPL trading on 03/23/2012, the BATS Market Maker Quoter is now quoting in a much tighter banding range in AAPL (during trading hours of 9:45 AM EST and 3:35 PM EST). Did someone at Apple call BATS and tell them to "knock that crap off"?

  • On April 4, 2012 BATS experienced the same technical problems experienced on March 23, 2012: BATS Stuck Quote Obscures NBBO. This begs the question that, at the very least, shouldn't software that powers a U.S. Stock Exchange be ISO Certified?
References:

Nanex