Latest Market Glitch Shows 'Trading Out of Control'
Published: Wednesday, 1 Aug 2012 | 3:52 PM ET
By: Jeff Cox CNBC.com Senior Writer
Wednesday morning's stock snafu had a familiar ring to it — mysterious volume in trades that simply could not have been made by a human comes surging out of nowhere, causing brief but acute market mayhem.
By now, many players on trading floors have gotten used to the disruptions that can come from the highly automated new world of high-frequency trading.
But that doesn't mean they like it.
"This algorithmic trading is kind of out of control," Phil Silverman, managing partner at Kingsview Capital, said as officials at the New York Stock Exchange tried to make sense of what happened. "It seriously hurts investor confidence."
By mid-afternoon, no one still quite knew exactly why about 150 stocks experienced a blinding surge in market volume, causing momentary disruptions in the prices of nine Dow components and a slew of others across various categories.
The NYSE said in the afternoon that it would cancel trades in six different stocks affected by the glitch, including Wizzard Software, China Cord Blood, E-House Holdings, American Reprographics and Quicksilver Resources. Trades executed at 30 percent higher or lower than the opening price will be canceled, the NYSE said.
Nearly 40 issues spiked more than 10 percent between the lows and highs, although prices of most of these issues stabilized in afternoon trading. Following are the 10 issues that gyrated the most in terms of percentage change between the day's low and the day's high price — Wizzard Software, China Cord Blood, E House, American Reprographics, Rare Element, Navidea Biopharm, Almaden Minerals, Quicksilver, Radioshack and Nordic American Tanker. Some of these shares trade on NYSE MKT, formerly NYSE Amex.
Authorities involved in reviewing the matter said Knight Capital, a trading outfit that employs algorithms used in high-frequency trading, said it experienced "technology issues" with its market-making procedures.
Ultimately, the broader market reacted little to the disruption, which was limited by circuit breakers and mechanisms at the NYSE to help contain the damage of HFT mistakes.
Traders, though, have grown weary of the problems and say the high-speed environment has changed the market in a bad way.
"When markets would have a big move, when things were really crazy, I would go out into the street and talk to people and they knew. Now, you get these big moves and people just don't care anymore," Silverman says. "They don't want to be a part of it, the high-frequency thing. The algorithmic situation needs to be looked at. We need to understand it better."
Firms create algorithms to buy and sell stocks according to formulas and market conditions. The high-speed robots trade with each other, seeking in transactions that can take microseconds to capitalize sometimes on fractions of a penny in stock moves.
While proponents say the rapid trading helps create liquidity and price discovery, regular investors have been fleeing the market, in part due to macro worries and in part because they don't feel they can compete in the automated trading world.
Dave Lutz, the managing director of U.S. trading at Stifel Nicolaus in Baltimore, cautions investors not to over-react to events like the Knight mistake.
"A lot of people seem to think it was human error. At the end of the day it wasn't necessarily a failure of systems," he said. "It's not a reason for people to lose confidence in the markets."
Still, had a human presence been involved somebody at least could have flagged the Knight trades as improper and perhaps stopped them before they hit the market.
But Lutz counters that the mistake was nowhere on par with the May 6, 2010 Flash Crash, where an error caused the Dow to lose nearly 1,000 points in a few minutes, or any of the other recent trading fiascoes.
"On the surface, it doesn't seem like it's any of that," he said. "It seems like it was simple human errors, and that's been happening since they've been trading underneath the maple tree."
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