Trades that caused split-second disruptions in about 140 companies and exchange-traded funds were canceled after a review by the firm that reported them, the latest mishap to draw attention to U.S. market structure.
The transactions occurred starting around 10 a.m. New York time on off-exchange venues and spurred momentary spasms in stocks from Nokia Oyj to Las Vegas Sands Corp. and Pandora Media Inc., according to data compiled by Bloomberg. The Financial Industry Regulatory Association said the unidentified firm that reported the trades was reviewing them for possible errors.
While the episode drew comparisons to the malfunction that cost Knight Capital Group Inc. $440 million on Aug. 1, it involved a fraction of the value. Almost all of the transactions canceled yesterday were one or two trades of fewer than 300 shares, followed by an instant rebound to the earlier price.
“If we’re talking about the relative damage of this problem compared to other trading issues we’ve seen, then clearly it was isolated,” Adam Sussman, head of research at Tabb Group, a New York-based consulting firm, said in a phone interview. “It’s another blemish on market structure and it’ll give people another reason to doubt the stability of equity markets.”
Rules governing when trades can be broken differ between exchanges and private venues. While regulations adopted after the May 2010 flash crash prohibit markets such as the New York Stock Exchange from canceling transactions that fall within preset price bands, they don’t apply when shares change hands on dark pools or when matched privately by brokerages.
“The TRF is kind of the Wild West because there’s no stated policy for clearly erroneous trades reported to the facility,” George Hessler, chief executive officer of Deep Liquidity Inc., an Austin, Texas-based alternative trading system operator, said in an interview. “It hasn’t been a problem to date.”
The transactions were sent to data feeds over the Finra/Nasdaq Trade Reporting Facility, which publishes equity prices from off-exchange venues such as dark pools. Finra said the firm that reported them was “reviewing the trades to determine whether corrections or cancellations” are warranted, according to a statement from Finra spokeswoman Nancy Condon. Almost all were subsequently reversed, Bloomberg data showed.
While most of the shares bought and sold in America changed hands on three main markets until the late 1990s, trading now is fragmented across more than 50 public and private venues as well as among brokers who match orders through a process known as internalization.
“These wild, computer-driven market swings just add to the view that the market is somehow rigged,” Edward Bozaan, a managing partner at New York-based Cleargate Capital LLC, said in an interview. “I do not believe markets are rigged, but it’s understandable how these mishaps can reduce confidence in the markets. The world does not need another flash crash.”
U.S. shares of Nokia jumped as much as 18 percent and fell more than 14 percent before the trades where canceled, while MEMC dropped as much as 20 percent. The Financial Select Sector SPDR Fund jumped as much as 2.8 percent before erasing gains and trading lower. Other stocks making unusual moves between 10 a.m. and 11 a.m. New York time included Pandora Media Inc., Hatteras Financial Corp. and Las Vegas Sands Corp.
Nokia American depositary receipts reached $3.17 with one trade at 10:28 a.m. in New York, and then tumbled to $2.30 within the next five minutes, according to data compiled by Bloomberg. The Espoo, Finland-based mobile-phone maker closed little changed at $2.68.
Last week, erroneous trades sent Kraft Foods Group Inc. up as much as 29 percent in the first minute of trading before they were canceled by exchanges. Regulators are studying ways to prevent electronic mishaps after a programming error almost sent Knight Capital into bankruptcy in August.
“Traders have to be extremely careful and put limits in when trading electronically,” Thomas Garcia, head of equity trading at Santa Fe, New Mexico-based Thornburg Investment Management Inc., said in an e-mail. His firm oversees about $80 billion. “Otherwise you are exposing yourself to risk.”
Richard Adamonis, a spokesman for NYSE Euronext, declined to comment. Robert Madden, a spokesman for Nasdaq OMX Group Inc., declined to comment.
MEMC, the second-largest U.S. polysilicon maker, reached $1.98 and $1.99 a share within the six minutes after 10:52 a.m. before rebounding to $2.40. The Financial Select Sector SPDR Fund traded at $16.49 and $16.45 in two trades totaling about 600 shares at 10:47 a.m. and 10:53 a.m. before retreating to $15.97.
“Since there are many stocks this time, it might be a fat finger program,” Larry Peruzzi, senior equity trader at Cabrera Capital Markets LLC in Boston, wrote in an e-mail.