Trading glitches upset Wall Street; stocks close lower after Fed talk
BY DAVID ROEDER Business Reporter firstname.lastname@example.org August 1, 2012 8:46AM
Trader Bobby Finnerty, left, calls to a colleague on the floor of the New York Stock Exchange Wednesday, Aug. 1, 2012. Stocks are mostly higher in morning trading. (AP Photo/Richard Drew)
Updated: September 3, 2012 1:14PM
Computer trading briefly ran amok Wednesday on Wall Street, causing huge spikes in volume for about 150 stocks.
The incident was attributed to a “technology issue” at a top market-making firm. While it did not start any marketwide panic, it delivered a black eye to a business whose reputation has suffered from a “flash crash” and two initial public offerings that were botched.
The problem occurred at the market’s open and lasted about 45 minutes, traders said. They couldn’t detect a pattern in the stocks that were affected, and prices in the broader market were little changed.
The Dow Jones industrial average fell 32.55 points to close at 12,976.13. Stocks slipped late in their session after the Federal Reserve finished a two-day policy meeting by saying the economy is weak but offering no new initiatives to support it.
The Standard & Poor’s 500 index slipped 4 points to 1,375.32 and the Nasdaq composite index declined 19.31 points to 2,920.21.
The New York Stock Exchange, which in the morning said it was reviewing activity for 148 stocks, said later it was canceling trades involving six small stocks that saw price swings of more than 30 percent from their opening level. The NYSE said its order applies to trades that crossed the 30-percent threshold between 8:30 a.m. and 9:15 a.m. Chicago time.
Traders said “circuit breakers,” various market-slowing rules enacted after the May 2010 “flash crash” in the Dow, helped limit the damage Thursday.
“Wall Street needs to perform better to retain customer confidence,” said David Herron, chief executive of the Chicago Stock Exchange. His exchange reviewed trading in some securities but reported no action such as canceling trades.
Many traders complain about the influence of rapid-fire orders based on algorithms, often called high-frequency trading. They have said the trading undermines everyday investors’ faith in the markets and contributed to glitches in the IPOs for Facebook and BATS Global Markets. The BATS issues were so bad that the IPO was withdrawn.
“These have happened not once, but a number of times, and unless they’re addressed they’ll continue to happen,” said Matthew Rubin, director of investment strategy at Neuberger Berman in New York.
But Herron said high-frequency trading cannot be removed from the markets. “Certainly, technology is not a bad thing. It has supported huge reductions in cost for customers,” he said.
Studies have shown that high-frequency trades account for more than half the market’s volume.
Knight Capital Group Inc., a top market-making firm, said in a statement that a “technology issue” affected its morning business at the NYSE. It said it advised clients to route their orders elsewhere.
As a market maker, Knight is required to continuously post buy and sell prices that allow easy trading.
Knight’s own stock suffered because of the glitch, losing almost a third of its value to close Wednesday at $6.94.
Experts said the glitch caused price swings in a diverse group of stocks, from Goodyear Tire & Rubber Co. and Pandora Media Inc. to CoreLogic Corp. and China Cord Blood Corp. Trading in some of the companies was temporarily halted under NYSE rules.