NEW YORK | Fri Jan 11, 2013 9:02am EST

NEW YORK (Reuters) - The complexity of modern markets means there are bound to be more events such as the systems error that led to hundreds of thousands of trades being executed improperly on BATS Global Markets over the past four years, the head of the No. 3 U.S. equities exchange said on Thursday.

A coding problem led to over 440,000 transactions being executed at prices that were not the best available, in violation of U.S. Securities and Exchange Commission rules.

The SEC's enforcement and trading and markets divisions are investigating the issue, said a person with knowledge of the matter. The person, who was not authorized to speak with the media, added that BATS' self-reporting of the problem would likely work in the exchange's favor.

It is possible that other such problems could be found as the exchange proactively seeks them out, Joe Ratterman, chief executive of BATS, said in an interview.

"There is going to be, between real-time dynamic systems, extreme edge case scenarios where things don't happen as you would expect," he said.

The trades in question made up 0.003 percent of the around 12.1 billion trades on BATS options and equities markets over the past four years and were executed within the expected range of outcomes of both the exchange and its customers, making the problem very difficult to discover, he added.

On Friday, in a routine self-audit of BATS' data, an operations person found an execution that looked improper and, after further research, noticed a pattern. The error has been occurring since BATS became an exchange in 2008 and cost BATS' customers a total of $420,361.

THE LATEST TECHNOLOGICAL FOUL-UP

"This is merely the latest in a series of technological foul-ups and demands regulatory attention, and a game plan to deal with getting a better handle on assessing technology and how markets are functioning," former SEC Chairman Harvey Pitt told Reuters.

High profile glitches in the past year include the attempted market debut of Lenexa, Kansas-based BATS in March, when a software error caused the company to take the extremely rare step of withdrawing its initial public offering of shares.

Technology errors also led to the botched Facebook Inc IPO on Nasdaq OMX in May and the trading error that nearly sank Knight Capital Markets in August.

The SEC routinely reviews such matters with the exchanges, said spokesman John Nester.

In 2011, the agency sanctioned No. 4 U.S. equities exchange Direct Edge for weak internal controls that led to millions of dollars in trading losses and a systems outage. Last year, NYSE Euronext paid $5 million to settle charges it gave certain customers "an improper head start" on trading information due to software issues and compliance failures.

In an interview on Wednesday with Reuters, outgoing SEC enforcement director Robert Khuzami said there is still much unfinished business for the enforcement division in the area of market structure.

"The new area that obviously is of concern has to do with platform trading and market abuse issues around high-frequency trading, algorithmic trading, market structure participants," he said. "We need more and better transparency into what is going on so we can determine to extent to which there are abuses that are occurring."

CYNICAL VIEW

As the complexity of automated trading systems has increased, it has become very difficult to effectively debug their code, said Larry Harris, professor of finance and business economics at the Marshall School of Business, University of Southern California.

The vast number of exchange order types, together with a long list of complicated regulatory rules, makes it is nearly impossible to test for all possible scenarios, he said.

"Dependence on computers is no defense for failures of business systems," he added.

Ratterman, a founding employee of BATS, who has led the company since June 2007, said that taking a "cynical view" of the soundness of the markets is not a bad thing, as it holds the market players to account.

"Because it is a real-time, dynamic system, we will continue to go in with the attitude that it is our job to find stuff, not that it is our job to prove that nothing is broken," he said.

Ratterman said BATS is working with is customers on the issue of compensation and will discuss it with the SEC. In all, 119 firms were impacted, although 74 of them would have a claim of less than $100 over the four years, he said.

BATS' U.S. equity market share on Thursday was 12.42 percent, up from its month-to-date average of 11.87 percent.

(Reporting By John McCrank.; Additional reporting by Sarah N. Lynch and Andre Grenon)

View the original article here

n" readability="113">(Reuters) - Emerging markets are, in essence, a leveraged way to play the bet that the Federal Reserve will continue its quantitative easing policy - always, everywhere and forever.

Whether that makes them a good investment is an entirely different question.

If you believe that the European Central Bank has taken euro break-up off of the table and that the Fed's pledge to continue buying bonds indefinitely until labor conditions improve will work, then expect fantastic returns from risk assets, and the riskier, as in emerging markets, the better.

There is, however, a more nuanced debate to have. Even if we don't believe that QE3 will "work" by the Fed's own definition, we may well expect that it will have a real and positive impact on asset markets for at least some portion of time. By buying relatively safe mortgage debt - and very possibly more Treasuries later - the Fed will put cash into the pockets of investors, cash which will need to find a home.

Some of it, clearly, has been flowing into emerging markets stocks, bond and currencies.

"Powerful policy puts by the ECB and the Fed have, at least in the near term, broken the stress-intervention cycle which has dominated markets for some time," wrote Piero Ghezzi, head of economics and emerging markets research at Barclays Capital, in a note to clients.

"While the timing of a global growth rebound remains uncertain, the tail risks for investors, in particular those related to the euro area, have been reduced. This improves the outlook for risky assets and should support flows into EM assets," he added.

Emerging markets shares have outperformed the S&P 500 in the past month, rising by more than 4 percent against 2 percent, during which time the ECB has taken action and the Federal Reserve instituted its new policy of open-ended quantitative easing. Over the past year, however, emerging markets have returned less than half the 23 percent gain of the S&P, and over two years the figures are deeply ugly, with emerging markets down by 5 percent against a 25 percent gain in the S&P.

THREE BIG RISKS

There are at least three large risks to a strategy of plunging into emerging markets to play the QE3 momentum trade. First, we don't know how long the positive effects will last. As in recent bouts of QE, the clear pattern has been for an initial quite positive reaction in markets, but an ebbing over months, especially if economic data does not improve. Returns from past easings have been diminishing over time.

It may well be that you get a nice ride upwards, but an equally magnified or greater fall if markets don't keep faith with central banks.

Also, you have risks that are particular to emerging markets if QE does work. It may well drive up commodity prices, as it has in the past. This is especially inflationary in emerging markets where poorer consumers spend a higher percentage of their money on food and energy. That's not just bad news from a human perspective; it may force central banks in emerging markets to keep conditions tight to fight inflation, hurting growth there in comparison to developed markets.

One of the points of QE, though not one officials emphasize, is to help growth in the countries where it is being done by driving down their exchange rates. Between the ECB, Fed, Bank of Japan and other central banks, we have a clear game of competitive currency devaluation going on, and it will only become more intense if economic conditions get worse.

This could be quite bad for emerging markets, which are more dependent on exports and have less well developed domestic consumer economies.

Finally, the big one: the Fed and the ECB may not succeed, and even if they do, politicians here may mess things up by sending the U.S. over the fiscal cliff. The International Monetary Fund warned on Thursday that emerging markets are increasingly vulnerable to another recession in the U.S. or Europe.

"There is no guarantee that the relative calm emerging economies have enjoyed over the past two years will continue," IMF economist Abdul Abiad said at a news conference. "There is a significant risk that advanced economies could experience another downturn, and in such an event, emerging economies and developing economies will end up 'recoupling' with advanced economies."

What the IMF calls 'recoupling' would look very much like a bloodbath in financial markets, with emerging markets seriously underperforming.

None of this eliminates the value of emerging markets as a source of potential diversification, and as a means to investing in economies which should, over time, grow more quickly than developed ones. But rather than a bet on decoupling, playing emerging markets today needs to be recognized as just a QE trade with booster rockets.

(At the time of publication James Saft did not own any direct investments in securities mentioned in this article. He may be an owner indirectly as an investor in a fund. You can email him at jamessaft@jamessaft.com and find more columns atblogs.reuters.com/james-saft)

View the original article here

HELSINKI | Thu Aug 2, 2012 6:37am EDT

HELSINKI Aug 2 (Reuters) - Italy's prime minister warned markets to give his country more credit for its fiscal reforms and said he favoured bold measures to tackle Europe's debt crisis, outlining a possible future policy path for the region as a key ECB meeting got under way.

Mario Monti, a technocrat drafted in after Silvio Berlusconi resigned as premier last year, said continued high borrowing costs for Italy could usher in a eurosceptic government that would renege on fiscal targets.

"I can assure you that if the (bond yield) spread in Italy remains at these levels for some time ... then you are going to see a... non euro-oriented, non fiscal discipline-oriented government taking power in Italy," he told a conference.

Italy's bond yields have stayed stubbornly high despite budget reform efforts steered by Monti, contributing to the pressure to match words with bold actions that European Central Bank President Mario Draghi is under after he pledged last week to do whatever it takes to save the euro.

Markets believe the main option on the table for the ECB is a resumption of its bond-buying programme, which would ease Spanish and Italian borrowing costs, though Reuters reported on Monday that that action could be weeks away.

Italy is due to hold elections next spring, which Monti has said he will not contest, but disagreements within the ruling coalition - in part over the cost of implementing tough austerity measures during a recession - have prompted speculation the government could fall this year.

Centre-right leader Berlusconi, who has hinted he may run again for prime minister, has made several comments in recent months suggesting that Italy could consider quitting the euro zone.

Running the rule over further options for strengthening the single currency bloc, Monti said he strongly favoured jointly issued bonds but admitted other measures in support of a European fiscal union would have to be introduced first.

On Wednesday, he predicted the euro zone's ESM rescue fund would eventually be granted a banking licence, allowing it to tap unlimited resources through the ECB's liquidity operations.

Euro zone paymaster Germany is strongly opposed to both measures. Finland has also said it opposes common euro zone bonds.

Monti was visiting Finland as part of a campaign for concerted action by euro zone governments and the ECB to help bring down peripheral sovereign borrowing costs.

Italian 10-year bond yields were 14 basis points lower on the day at 5.94 percent.

View the original article here