Regulators must address a “crisis of confidence” as the complexity of U.S. market structure rattles investors, Duncan Niederauer, Chief Executive Officer of NYSE Euronext (NYX), said today as market-maker Knight Capital Group Inc. (KCG) fought for its life after a trading error.
“The growing fragmentation and uneven regulation across what is now hundreds of competing platforms continue to fuel a crisis of confidence among investors,” Niederauer told analysts today after the company released earnings. “It’s just too hard for them to understand how the markets works.”
Knight’s shares lost 75 percent in two days after its computers flooded the market with unintended trades, sending dozens of stocks into spasms. The programming bug swept through the market at the open of exchanges on Aug. 1. Knight rebounded 30 percent today following reports that it told some clients it had secured short-term financing to avoid collapse.
The software malfunction was the latest black eye for the computer infrastructure of an equity market still haunted by the May 2010 market crash, the botched initial public offering of Facebook Inc. and failed IPO of Bats Global Markets Inc.
“Market structure has gotten incredibly complex,” Niederauer said. “It’s virtually impossible to explain to a policy maker or an investor any more.”
The New York Stock Exchange reviewed trading in 140 stocks from Molycorp Inc. to AT&T Inc. as the market’s Aug. 1 open was disrupted. Trades that occurred during the height of the volatility were canceled in six securities, where prices swung at least 30 percent in the first 45 minutes. Trades in all of the other stocks were allowed to stand.
“The market model we have here helped us flag this issue sooner than I think others would have been able to,” Niederauer said. “Within minutes we were in contact with Knight to begin working through the issue with them. Subsequent to that they’ve clearly articulated what the problem was.”
Knight Chief Executive Officer Thomas Joyce told Bloomberg Television’s “Market Makers” program with Erik Schatzker and Stephanie Ruhle yesterday that while the bug sent “a ton of orders, all erroneous” into the market as the firm prepared to trade with the NYSE’s new so-called retail liquidity program, it had “nothing to do” with the NYSE.
“Tom Joyce has handled this rather unfortunate situation as well as he could have, from my point of view, in terms of how he’s communicated, how upfront he’s been and how accountable he’s been,” Niederauer said. “He’s to be commended for that.”
Knight has been fighting to preserve its business as concern grew about its solvency. Analysts at CLSA Credit Agricole Securities said yesterday that bankruptcy was a possibility if it failed to get financing. The trading fault, which caused stocks to move as much as 151 percent, left the firm with a “large error position,” Knight’s Joyce said.
The world’s biggest stock exchange today reported second- quarter profit that beat estimates and cut its cost guidance for the year. Second-quarter earnings excluding some items fell to 51 cents a share, compared with 61 cents a year ago as equity and derivatives trading dropped. That exceeded the 50-cent average estimate of analysts surveyed by Bloomberg, whose projections ranged from 48 cents to 52 cents.
“The structure that has evolved over the last decade in the U.S. has led to inexorable fragmentation, really an emphasis on speed, a feeling that if something is faster, then by definition it’s better,” Niederauer said. “We are understanding that speed is not always better.”
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