NYSE Software Glitch Spurs $7.9 Billion ETF MispriceMichael P. Regan and Nina Mehta
Regulators can add a faulty software update at NYSE Euronext’s electronic Arca stock market to the list of mishaps that have weighed on investor confidence.
A system upgrade at Arca triggered what appeared to be a 9.6 percent plunge yesterday in an exchange-traded fund that tracks the Standard & Poor’s 500 Index, a drop that would have erased $7.9 billion from one of the most popular securities in the U.S. Data published by the electronic venue at 4:15 p.m. New York time showed the SPDR S&P 500 ETF Trust at $106.46, compared with its opening level of $117.74.
The prices were later voided and the closing price updated to $118.54, up 0.7 percent, exchange officials said.
“Something went wrong. The question is why,” said James Angel, a finance professor at Georgetown University in Washington. “For them to cancel the trades is probably causing heartburn in back offices across the country.”
The glitch in the fund with a market value of more than $80 billion comes as federal regulators are trying to prove U.S. exchanges still work after the May 6 crash that erased $862 billion of share value in 20 minutes. Data showing the decline appeared just as Apple Inc. and International Business Machines Corp. were releasing quarterly profit statements.
The apparent plunge in price involved 7.2 million shares in the closing auction on NYSE Arca, according to data compiled by Bloomberg. The S&P 500 rose 0.7 percent to 1,184.71 yesterday.
“People were very focused on after-market trading because of IBM and Apple earnings so it was very confusing when the price discrepancy happened,” said Andrew Ross, a partner and global equity trader for First New York Securities LLC, who trades ETFs. “It was alarming that it could happen.”
The exchange operator said its 4 p.m. closing auction in securities listed on NYSE Arca was delayed for 15 minutes because of an issue with a software release. Auction prices occurring at 4:15 p.m. will be the official closing price for all other securities except for the SPDR S&P 500 ETF. The ETF slipped 1.5 percent to $116.73 today.
NYSE Arca will “bust” all the $106.46 trades, according to an e-mail from exchange spokesman Raymond Pellecchia. The fund managed by State Street Global Advisors is one of the most heavily traded securities in the U.S., averaging 223 million shares a day this year, data compiled by Bloomberg show.
“The issue has been resolved,” Pellecchia said in an interview yesterday. “Operations will be normal tomorrow.” Marie McGehee, a spokeswoman for State Street Corp., declined to comment.
Trading in another security linked to the S&P 500, the E-Mini futures contract traded on the Chicago Mercantile Exchange, helped start the May 6 crash that briefly sent the Dow Jones Industrial Average down 998.5 points, according to regulators. A mutual fund company’s automated sale of the contract without regard to price and “hot potato” trading by computer-driven firms set off the rout, according to the Securities and Exchange Commission and Commodity Future Trading Commission report.
The 104-page study released Oct. 1 said trading software known as an algorithm linked the rate at which it traded the E-Mini contract to overall market volume. The initial sales spurred a flurry of buying and selling among high-frequency traders, which in turn led the algorithm to sell faster.
SEC Chairman Mary Schapiro is trying to protect investors in a fragmented U.S. stock market while maintaining liquidity on exchanges dominated by firms that profit from computerized trading.
The May crash prompted exchanges to implement circuit breakers that pause trading in more than 1,300 securities during periods of volatility. Uniform policies for canceling trades and eliminating stub quotes, or bids and offers at prices far away from the stock’s last sale, have also been proposed or adopted.
Nasdaq canceled more than 50 trades in Progress Energy Inc. on Sept. 27 after the shares plunged 90 percent, triggering stock circuit breakers imposed after the May 6 crash. The exchange cited an “inaccurate limit price entered by a trading firm” for the mistaken transactions.
Two weeks earlier, a 100-share order for Nucor Corp. that triggered a 99.98 percent decline was canceled by the CBOE Stock Exchange. Nucor fell from $35.71 to 1 cent on the voided purchase, data compiled by Bloomberg show.
About 200 trades in Core Molding Securities Inc. were canceled on Aug. 26 after the stock plunged from above $4 to below a penny in two seconds after going untraded for the first 4 1/2 hours of the day. NYSE Amex, the Nasdaq Stock Market and Nasdaq’s BX platform canceled all trades at or below $3.94.
Yesterday’s mispricing “indicates a breakdown in market mechanisms,” Georgetown’s Angel said. “I hope the regulators are looking at it.”
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