By Philip Elmer-DeWitt
March 24, 2012

The flash crash that knocked $52 billion off Apple’s market cap was hardly the first

By now anybody who reads the business pages knows that BATS Global Markets screwed up its initial public offering big time Friday by mangling trades in a bunch of stock symbols at the top of the alphabet, including Apple (AAPL) and BATS, its own stock.

Apple’s shares briefly fell by more than $55 per share. BATS, which had been trading for more than $15, fell to less than 4 cents.

NASDAQ quickly erased all those trades and BATS was allowed to cancel its IPO.

The official explanation for what happened  — or at least the one BATS and the Security Exchange Commission worked out Friday — is that software in a server covering stock symbols from A to BFZZZ went a little haywire, spitting out what are known on the Street as “false prints.”

That made more sense than the original explanation — a so-called “fat finger” trade caused by someone hitting the wrong keys. It’s hard to imagine anyone hitting $542.80 — the price that was entered for Apple — when they meant to hit $598.23 (the price Apple was trading for) or anything like it.

But investors are understandably suspicious. For one thing, these “false prints” happen a lot more frequently than BATS’ uptime record would suggest. Apple investors are still complaining about a mini-flash crash Tuesday morning when Apple suddenly dropped from just under $600 to $570. That print was erased, but a $582 trade that looked equally bogus was allowed to stand.

Why, these investors ask, do false prints and fat finger trades always happen on the downside, where they benefit hedge funds running computer-driven algorithms through high-frequency trading platforms like BATS, the largest of the independent exchanges.

In 2011, BATS accounted for more than one in 10 U.S. stock trades, processing an average of 29,000 trades per second. Against that kind of computer power, retail investors don’t stand a chance.

The SEC was already talking to BATS about its role in the 2010 flash crash — the one that temporarily erased $1 trillion in market value. Maybe now they’ll take a closer look.

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