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."
© 2012 CNBC.com
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