By Philip Elmer-DeWitt
March 23, 2012

A circuit breaker kicked in after high-frequency trades from BATS triggered a flash crash

The hearts of Apple (AAPL) traders stopped briefly at 10:57 a.m. Friday when the company’s share price, which had opened the day at $600.49 suddenly plummeted 9.4% to $542.80.

The rapid fall triggered a circuit breaker and trading was halted for five minutes. When it resumed, Apple was down $3 to $597.58.

The source was quickly traced to a flurry of high-frequency trades issued by BATS Global Markets, one of the largest high-frequency computer-driven trading platforms. BATS operates two exchanges which together account for 10% to 12% of all U.S. equity trading on a daily basis.

Most observers wrote the incident off as an error — a so-called “fat finger” trade caused by someone hitting the wrong key.

But there have been a rash of such trading anomalies lately, and they can wreak havoc on a stock as volatile as Apple.

As it happens, the
Wall Street Journal
reported earlier in the day that the Securities Exchange Commission was investigating the high-frequency exchanges — including BATS — as part of a broader probe into whether the new trading platforms are using their high-speed links to the major stock exchanges to gain an unfair advantage.

“As part of this effort,” the Journal reported, “the SEC is looking at communications between exchanges and high-frequency trading firms. Investigators are examining whether firms collude to limit competition or manipulate markets, according to a person familiar with the matter.”

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