NYSE Computer Issue Led to No Closing Auction in 216 Stocks

The New York Stock Exchange stopped trading in 216 securities yesterday and canceled their closing auctions because of an outage in a computer that matches buy and sell orders and process transactions.

The affected stocks, which included Travelers Cos. (TRV) and U.S. Steel Corp., continued to trade on other exchanges, such as NYSE Euronext (NYX)’s electronic NYSE Arca platform and Nasdaq Stock Market. The exchange’s systems are “functioning normally for all symbols” today, according to an e-mail sent to traders this morning before the market opened.

While the fragmentation of American equity markets over the last decade left dozens of other venues to trade those NYSE- listed securities during the day, the elimination of Big Board closing auctions was potentially a bigger disruption since the vast majority of orders seeking the official closing price are sent to the exchange to participate in the day-end process. The auction, which collects orders to determine a final price for a security, is important to fund managers and brokers who are obliged to buy and sell at that level.

“To the best of our knowledge, this was the first time that we didn’t use the NYSE closing auction,” Richard Adamonis, a spokesman for NYSE Euronext, said in a phone interview. “The problem seemed to be a software programming issue related to the individual server for these 216 symbols.”

Shifting Companies

While the NYSE’s outage was invisible to anyone but professional traders, it follows a series of mishaps on electronic trading systems in the past year. Computer malfunctions played roles in Knight Capital Group Inc.’s $457 million trading error in August, the mishandling of Facebook Inc.’s initial public offering on the Nasdaq Stock Market, and Bats Global Markets Inc.’s withdrawn IPO in March.

The exchange is in the process of shifting companies listed on NYSE to its Universal Trading Platform matching engines from its Super Display Book system and supporting database. On Nov. 9 it moved 109 corporations to UTP and added another 107 yesterday. The 107 will temporarily revert to their Nov. 9 configuration, Adamonis said. The “root cause of the issue” will be addressed by a software fix later this week, a notice sent before 5:30 p.m. New York time yesterday said.

NYSE’s closing auction represents 98 percent of end-of-day trading in Big Board-listed stocks, according to the exchange. It handles 97 percent of trading in those companies at the start of the day.

Stock Volume

U.S. equities volume was 4.62 billion shares, compared with the three-month daily average of 5.98 billion shares. Yesterday was the official observation of Veterans’ Day, a federal and bank holiday.

NYSE accounted for 291.9 million shares of trading in companies it lists yesterday, the lowest level all year, compared with 767.7 million shares a day on average this year, according to data compiled by Bloomberg. Yesterday’s level was 11.4 percent of trading in its own companies, compared to 20.9 percent for all of 2012.

“We were lucky it was light trading because of the holiday,” Ben Schwartz, the Chicago-based chief market strategist at broker Lightspeed Financial LLC, said in a phone interview. “The effect was minimal, almost a non-event. People were limited in their exposures and there was very little hedging that needed to be done.”

NYSE said in a notice published on its website at 9:46 a.m. yesterday that it was experiencing an “issue” with a matching engine that affected order processing and transactions in 216 companies. Shortly after 3:30 p.m. the exchange said it wouldn’t resume trading in those stocks and wouldn’t hold closing auctions for them.

Nasdaq Cross

“It is unusual to have an issue like this,” Mark Turner, head of U.S. sales trading at New York-based Instinet Inc., said in a phone interview before the market closed. He predicted some traders would switch orders to Nasdaq in an attempt to participate in that venue’s so-called closing cross for stocks listed on the NYSE.

NYSE distributed a list of official closing prices for each of the 216 securities based on the “consolidated last sale” at almost 5:30 p.m., an hour and a half after the official closing levels are normally disseminated. The consolidated last sale is the last transaction of the day that meets certain requirements and can occur on any market.

Other companies among the 216 affected by the technical problem include GlaxoSmithKline Plc, Eaton Vance Corp., Nucor Corp., Panasonic Corp. (PC), PG&E Corp. and Tyco International Ltd. (TYC)

Index Calculation

The Standard & Poor’s 500 Index will use the consolidated last-sale price NYSE publishes to calculate its closing level, according to a statement from S&P Dow Jones Indices, a joint venture owned by the McGraw-Hill Companies and CME Group Inc. All indexes that include any of the 216 NYSE-listed stocks were affected by the disruption, the index group owner said.

NYSE Euronext has been in close contact with the Securities and Exchange Commission and Financial Industry Regulatory Authority during the day, according to a person familiar with the matter who asked not to be identified because the discussions are private. Finra officials were on the trading floor yesterday, as they always are, the person said.

“From a market quality perspective, a proper liquidity event at the close is a foundational event in the market,” Jamie Selway, managing director and head of liquidity management at broker Investment Technology Group Inc., said by phone. “This is why many of us worked so hard the week of Hurricane Sandy to help ensure NYSE was open on Oct. 31 to do a closing print.”

Exchanges Shut

Hurricane Sandy caused a shutdown of U.S. stock markets and equity index futures on Oct. 29 and 30 as the Atlantic Ocean’s largest-ever tropical storm flooded parts of lower Manhattan and produced life-threatening surges in a region with 60 million residents. Exchanges, brokers and regulators including the SEC, Commodity Futures Trading Commission and New York Fed wanted the market to open on Oct. 31, according to people who asked not to be identified because the discussions weren’t public.

Yesterday’s technical problem was a reminder that the industry needs an alternative for the opening and closing auctions when the main listing exchange can’t conduct those events, Selway said.

“It reminds us we need to collectively sort out this question,” he said. “I don’t think it should be hard.”

To contact the reporter on this story: Nina Mehta in New York at nmehta24@bloomberg.net

To contact the editor responsible for this story: Lynn Thomasson at lthomasson@bloomberg.net

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