Speedy Trading — Again

August 2, 2012

On Wednesday, August 1, traders on the New York Stock Exchange [NYSE] and other US equity exchanges had a more than usually interesting morning.   Shortly after the market opened, unusually high trading volumes and large price swings occurred in more than 100 stocks, including well-known names like Coca-Cola, IBM, and McDonalds, as well as smaller firms like Wizzard Software, Kronos Worldwide, and Trinity Industries.  The wild price gyrations in some stocks were reminiscent of the “flash crash” of May 6, 2010 (which I wrote about several times here), and of the more recent problems connected with Facebook’s initial public offering [IPO] in May of this year.  As in the 2010 incident, the problem appears to have been connected to am automated trading system; according to a report in the New York Times,

An automated stock trading program suddenly flooded the market with millions of trades Wednesday morning, spreading turmoil across Wall Street and drawing renewed attention to the fragility and instability of the nation’s stock markets.

The problem appears to have originated in the market-making unit of Knight Capital Group, a New Jersey broker that executes “algorithmic” trades on behalf of other firms.  According to a report from Bloomberg News Service, Knight said the problem was due to a “technology issue”:

Knight’s initial review indicated a “technology issue” occurred in the company’s market-making unit related to the routing of shares to the NYSE, according to an e-mail from spokeswoman Kara Fitzsimmons.

Trading in several issues was suspended for a time; after reviewing trades in over 100 stocks, the NYSE announced that it would void trades in six issues that exhibited particularly wide price swings.

Trades that occurred 30 percent above or below the opening price in Wizard Software Corp., China Cord Blood Corp. (CO), Reaves Utility Income Fund, E-House China Holdings Ltd., American Reprographics Co. and Quicksilver Resources Inc. will be voided, according to a statement on the NYSE website.

Knight Capital itself was badly affected; according to a report at the Washington Post, the “trading glitch” will cost the firm $440 million.

A technical problem that briefly threw dozens of stocks into chaos Wednesday will cost Knight Capital Group $440 million, the trading firm said Thursday. Knight’s stock plunged for a second day, erasing 70 percent of its value from two days ago.

That’s a hell of a glitch.  The situation is also embarrassing for the Knight Capital CEO, Thomas Joyce, who has been a vocal critic of NASDAQ for the problems it experienced during the Facebook IPO.

Apart from the immediate disruption and costs associated with these incidents, there is a concern that they are eroding ordinary investors’ confidence in equity markets, and that they may be a warning that those markets have lost sight of their primary purpose.  I’ll talk about some of those issues in future posts.

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