Technology Makes Trading Errors More Visible, Credit Suisse Says
While market disruptions such as trade cancellations are becoming less frequent, the decline has gone unnoticed because electronic tracking techniques make today’s errors more visible, according to Credit Suisse AG.
Better monitoring capabilities and data linked across exchanges allow companies to find errors that would have previously been unreported, said Ana Avramovic, a New York-based analyst at Credit Suisse’s trading-strategy unit. The percentage of equities transactions voided fell to a nine-year low in 2012, data compiled by NYSE Euronext show.
“A lot of things get totally blown up and defined as a glitch when they’re not a big deal,” Avramovic said in a phone interview.
Technology breakdown are less significant than they appear because when trading stops on one venue, orders will be routed to other functioning markets, she said. U.S. stock-market trading today is fragmented across more than a dozen exchanges and electronic communications networks and about 50 dark pools.
The $450 million trading loss at Knight Capital Group Inc. in August increased pressure on Washington regulators to prove they are equipped to protect investors in markets that are increasingly computerized and fragmented. U.S. Securities and Exchange Commission Chairman Mary Schapiro, whose agency is the main market overseer in Washington, promised to issue regulations to help prevent similar mishaps.
Faster computers can identify mispricings more quickly and make traders aware of problems before they become severe, she said. More frequent reporting of errors has led some people to exaggerate their significance, spurring calls for regulators to clamp down on broken markets, according to Avramovic. Regulators should put small problems into perspective before making changes that affect the entire market, she said.
In 2012, 0.18 percent of U.S. equities volume was voided by exchanges or Finra because the trades were deemed erroneous, down from 0.23 percent last year and a high of 0.43 percent in 2004, according to data from NYSE Euronext.
Eliminating every trading error is impossible and the way to address malfunctions that have plagued equity markets is to improve testing and oversight, industry executives said at an October meeting in Washington. Making risk measures redundant, designing systems that operate independently of each other and making frequent, incremental changes to software will limit the inevitable mistakes by humans and computers, Getco LLC said in written testimony last year.
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