NYSE Computer Error Prompts Cancellation of Almost 20,000 Trades

A computer malfunction at IntercontinentalExchange Group Inc.’s two U.S. options exchanges yesterday caused almost 20,000 erroneous trades that were later canceled.

On the NYSE Amex Options market, 12,830 orders involving 462,468 contracts were busted, while the tally at NYSE Arca was 6,932 trades and 34,484 contracts, according to notices sent by the exchanges. Affected securities included Apple Inc., Amazon.com Inc., Facebook Inc., MasterCard Inc. and the SPDR S&P 500 ETF Trust. The erroneous trades happened from 9:30 a.m. to 9:43 a.m. New York time yesterday.

The error was one of the biggest since Goldman Sachs Group Inc. bombarded the options market with trades it didn’t mean to send on Aug. 20. That event, coupled with a three-hour freeze for trading of Nasdaq-listed stocks on Aug. 22, prompted U.S. Securities and Exchange Commission Chairman Mary Jo White to summon market chiefs to Washington and demand they improve their technology and procedures. Among her requests: review how they decide whether to cancel bad transactions.

Eric Ryan, a spokesman for Atlanta-based ICE, said yesterday’s error was caused by a computer malfunction at the exchange operator. He declined to comment further. While the problem was still going on, NYSE Arca said in a statement that it “will be cancelling all live complex orders. Complex orders will remain unavailable on NYSE Arca Options until further notice.”

SEC Rule

“Any disruption that happens right around the open or close is more meaningful than intraday,” Anshul Agarwal, an equity derivatives strategist at Bay Crest Partners LLC in New York, said by phone yesterday. “Around the open, people have their orders ready to go, so it’s magnified. It puts a question mark in people’s minds about making orders like this for the rest of the day.”

ICE plans to upgrade the exchanges’ technology. After buying the exchange operator in November, ICE purchased Algo Technologies Ltd. with plans to use its technology to serve as the new NYSE matching engine, which is the software that pairs up buyers and sellers at an exchange, according to people familiar with the matter.

NYSE Arca cited rule 6.89 when voiding the trades, a regulation that permits cancellations resulting from a “disruption or malfunction in the use or operation of any electronic communications and trading facilities of the exchange,” according to the SEC website.

‘No Way’

On average, more than 17 million options have traded daily in the U.S. this month, according to data compiled by Options Clearing Corp.

The error didn’t seem to roil the entire market, said Matt Skipp, who manages about C$36 million ($33 million) as chief investment officer at Sw8 Asset Management Inc. in Toronto. ICE operates only two of the 12 U.S. options exchanges.

“I didn’t run into any issues -- I just wasn’t active in the options this morning,” Skipp said during an interview yesterday. “Anecdotally, I didn’t sense any market dislocations with whatever happened this morning. And I was watching the opening, too.”

Traders who saw their transactions voided have grounds to be unhappy, he added.

“I would be royally, royally ticked off if a broker, exchange or client mistakenly sold equities and I bought and then found out that they’d all been canceled later,” Skipp said. “So you’re allowed to go at the market in a very sophisticated fashion, at a thousand miles an hour with 8,000 different orders and your sole goal is efficacy, and when it backfires on you you’re allowed to claim foul? No way. That’s your game.”

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