SEC launches probe into NYSE glitch that caused wild price swings

Papa Linc

1 year ago

Federal regulators are investigating a glitch at the New York Stock Exchange that drove wild price swings in blue-chip stocks, and resulted in the cancelation of trades in more than 250 securities, including shares of Nike, Verizon and McDonald’s.

The NYSE, which is owned by Intercontinental Exchange, said a ‘system issue’ prevented the opening auctions in a subset of its listed stocks on Tuesday morning.

Those stocks began trading without an opening print, or the price used as the benchmark at the opening bell, causing erroneous pricing that the exchange said will be declared null and void, with the resulting trades canceled.

The US Securities and Exchange Commission said it was reviewing the issue, which experts believe could have cost brokers and small traders tens of millions of dollars.

‘Such events are extremely rare, and we are thoroughly examining the day’s activity to assure the highest level of resilience in our systems,’ said NYSE’s Chief Operating Officer Michael Blaugrund in a statement to DailyMail.com.

Traders look at displays for information about a trading malfunction on the floor at the New York Stock Exchange on Tuesday. Federal regulators are investigating a glitch at the exchange that drove wild price swings in blue-chip stocks

Shares of Nike plunged 12% at the opening bell after a glitch on the NYSE prevented the opening auctions of more than 250 listed securities

Blaugrund added: ‘We ended the day with a normal market close and expect a regular open on Wednesday.’

A spreadsheet released by the exchange showed 251 affected securities, including shares of Nike, ExxonMobil, 3M, Verizon, McDonald’s, Wells Fargo and Walmart.

The glitch is the most recent in a series since the ‘flash crash’ of 2010, and infuriated traders who were either unable to execute trades at the opening bell, or saw their trades canceled after they executed at erroneous prices.

‘What appears to have happened is a technical glitch where all of my opening orders on the NYSE autocancelled even though some of them should have been fulfilled,’ said Dennis Dick, trader at Triple D Trading.

‘They have corrected that now, but this is going to be a big mess to clean up.’

The exact cost of the fallout from the glitch is unclear, but the cost to brokers and retail traders is likely to be in the eight-figure range, according to a person at a major brokerage who spoke on condition of anonymity because the matter is sensitive.

McDonald’s stock plunged 9% in the opening seconds of trading after the ‘system error’

A trader is seen during the glitch that caused disruption on the NYSE on Tuesday morning

‘Obviously, there were a lot of stocks that had major issues,’ said Joe Saluzzi, co-manager of trading at Themis Trading in Chatham, New Jersey. ‘It’s a bit of a mess.’

Saluzzi said there was ‘zero failure tolerance’ among traders for glitches at the key open and close of trading.

‘This is a failure, there is no sugarcoating it,’ said Saluzzi. ‘There are definitely people who are losing money today who are not happy.’

The opening auction gaffe comes as the SEC is considering routing most retail stock orders through auctions, with the aim of getting individual investors better prices.

‘The SEC’s plan to make us all cool and groovy with consumer auctions leaves a lot to be desired,’ said James Angel, a finance professor at Georgetown University.

‘Auctions are a lot more complicated than it looks. Lots of things can go wrong,’ said Angel, who helped work on Nasdaq Inc’s auction process.

The NYSE-listed stocks trade on all 16 US stock exchanges, which use the NYSE’s prices.

Saluzzi said that having multiple exchanges does not help in a situation like this as the only place to trade an opening order on a New York Stock Exchange-listed stock is that exchange itself.

Traders watch displays that indicate that some stocks were halted on the floor at the NYSE

The NYSE is the only major US stock exchange that still uses a trading floor, along with electronic trading, a hybrid model the exchange says facilitates price discovery during market opens, closes, and during periods of trading imbalances or instability.

Technical errors at exchanges can erode market confidence.

‘I had a few discretionary trades to place but chose to wait an additional 30 minutes or so after things seemed to normalize to be sure there were no issues,’ said Seth Hickle, derivatives portfolio manager at Innovative Portfolios in Indianapolis, Indiana.

To hold exchanges accountable for such glitches, the SEC adopted a sweeping set of business continuity and disaster recovery rules called regulation system compliance and integrity (Reg SCI) in 2014.

In March 2018, the NYSE was the first exchange fined under Reg SCI. The $14 million fine partly related to a nearly four-hour trading halt in July 2015 that resulted from a flawed software rollout.

Wall Street’s troubled history of glitches and outages

The New York Stock Exchange suffered a technical problem at the opening of trading on Tuesday that caused more than 80 stocks to be halted for several minutes, creating confusion among traders about which orders were filled and where stocks were trading, and harking back to the ‘flash crash’ of 2010.

WHAT WAS THE ‘FLASH CRASH’ OF 2010?

On May 6, 2010 when equities were recovering from the financial crisis and in the early stages of what would become a near-eleven year bull market, the Dow Jones Industrial Average fell almost 700 points in mere minutes, briefly erasing an estimated $1 trillion in market capitalization.

This led some market participants to voice complaints that increasingly automated trading posed a systemic risk. Others saw such a shocking market tumble as an outlier, and the cost of progress, that just needed additional guardrails in order to avoid a repeat. Nevertheless, it drew comparisons to the October 1987 Wall Street collapse.

WHAT WAS THE RESPONSE TO THE 1987 CRASH?

After the ‘Black Monday’ crash in 1987, the US Securities and Exchange Commission (SEC) mandated the creation of market-wide ‘circuit breakers’ that required a temporary halt to trading for every 10% decline in the Dow, in what can be seen as a precursor to later rules. In 2012, the benchmark index for the circuit breakers changed to the S&P 500 and the percentage levels needed to trigger the trading halt were lowered.

Unlike the Black Monday crash, the ‘flash crash’, was largely seen as something that could have been prevented with more intervention and the SEC quickly responded with some small fixes, along with a promise to investigate concerns about the increasingly complicated and fragmented stock market. In addition, a special committee of experts made recommendations on how to prevent another crash.

One of the measures adopted in 2011 was for single-stock circuit breakers, a 5-minute trading halt in any stock or exchange-traded fund (ETF) that moved more than 10% in less than 5 minutes. That rule was replaced in 2012 by the ‘Limit-Up Limit-Down’ regulation, which pauses trading in a stock if it trades outside of a specific range based on a rolling price.

Meanwhile in 2014, the SEC adopted a set of rules called regulation system compliance and integrity (Reg SCI) to hold exchanges accountable for such interruptions to trading.

The bands ‘Limit Up Limit Down’ were adjusted after a trading session in August 2015 that saw more than 1,250 trading halts in 455 individual stocks and ETFs.

HAVE THERE BEEN OTHER GLITCHES SINCE 2010?

There have been instances, of varying severity, since the 2010 crash where trading was unable to take place. A memorable interruption was the delayed debut of Meta Platforms, what was then Facebook, in its initial public offering. Others included a three-hour trading halt on Aug. 22, 2013 and the Aug 2015 session that saw trading halted for nearly four hours.

The Chicago Board Options Exchange saw two outages within a week in 2013.

But until Tuesday’s technical problem, major outages have been largely contained in recent years. Notable exceptions affected individual investors more than large institutions, such as the 2020 glitches that affected trading on retail brokerages Robinhood Markets and Interactive Brokers Group.

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