Blame Electronic Trading for Stocks Plunge, NYSE Official Says
Computerized trades sent to electronic networks turned an orderly stock market decline into a rout, according to Larry Leibowitz, the chief operating officer of NYSE Euronext. Nasdaq OMX Group Inc. canceled trades in 286 securities that rose or fell 60 percent or more.
While the first half of the Dow Jones Industrial Average’s 998.5-point intraday plunge probably reflected normal trading, the selloff snowballed because of orders sent to venues with no investors willing to match them, Leibowitz said in an interview on Bloomberg Television.
“If you look at the charts you can see fairly clearly where the trades came in,” he said from New York. “It’s that V-shaped drop where it came down and snapped right back up. You had some very high-cap stocks trading down 50 percent or large percentages in a split-instant because there really was no liquidity in electronic markets.”
The selloff briefly erased more than $1 trillion in market value as the Dow average tumbled 9.2 percent, its biggest intraday percentage loss since 1987, before paring the drop. The U.S. Securities and Exchange Commission and the Commodity Futures Trading Commission are reviewing “unusual trading” that contributed to the plunge.
More than 29.4 billion shares changed hands in all U.S. markets today, including traditional exchanges such as the NYSE, rivals Bats Global Markets Inc. in Kansas City and Jersey City, New Jersey-based Direct Edge LLC, and other electronic platforms. The level compares with 2.58 billion traded on the NYSE, making it the biggest gap between the two in more than three years, data compiled by Bloomberg show.
Increasing automation and competition have reduced the Big Board and Nasdaq’s volume in securities they list from as much as 80 percent in the last decade. Now, two-thirds of trading in their companies takes place off their networks because orders are dispersed across dozens of competing venues.
Nasdaq OMX in said it will cancel stock trades that were more than 60 percent above or below price levels at 2:40 p.m. New York time, just before U.S. equities plummeted. The New York-based firm investigated trades between 2:40 p.m. and 3 p.m.
“The fact that it snapped back so quickly made it clear that it was an aberration,” Leibowitz said. “When a large order or series of orders comes into electronic markets, they don’t really have any way to recognize either that they’re a mistake or to slow them to down to attract the proper liquidity on the other side.”
The NYSE doesn’t know where the trades that triggered the selloff originated, according to Leibowitz. Citigroup Inc. said it found “no evidence” that it was involved in erroneous trades, a finding supported by futures market CME Group Inc., after U.S. equity markets plunged today.
The market rout triggered scrutiny from lawmakers. U.S. Representative Paul Kanjorski, a Pennsylvania Democrat, set a May 11 hearing. U.S. Senator Ted Kaufman, a Delaware Democrat, questioned whether markets that increasingly rely on computer algorithms to execute thousands of transactions in seconds triggered false trades.
“This is unacceptable,” Kanjorski, who leads a House Financial Services subcommittee that oversees the SEC, said in a statement. “We cannot allow a technological error to spook the markets and cause panic.”
Accenture Plc, Exelon Corp. and Philip Morris International Inc. were among 27 U.S. stocks with at least $50 million in market value that dropped more than 90 percent as U.S. equities tumbled, before recovering by the close, according to Bloomberg data excluding exchange-traded funds.
The Nasdaq’s decision means that trades in Cincinnati-based Procter & Gamble Co., which fell as much as 37 percent for the biggest intraday drop in the Dow industrials, would stand. The world’s largest consumer products company said stock trades that pushed its shares down were probably an error.
“Our greater concern is not the fact that a trade error occurred at all but the magnitude of its impact,” Birinyi Associates Inc., the research and money-management firm founded by Laszlo Birinyi, said in a note today. “We propose that when trading errors have occurred in the past, their impact has not been as significant and impactful because of the existence of human intervention.”