Algorithms Gone Wild

In what seems to be turning into a weekly event, reports are coming out of India today that 59 erroneous trades caused the National Stock Exchange (NSE) Nifty index to plunge over 800 points in a few minutes, wiping out some $58 billion in value from the fourth largest market in Asia, Bloomberg News reported. Trading was suspended for about 15 minutes this morning until the erroneous trades could be straightened out.

According to an Indian Express story that quoted from an NSE statement, a trader at Emkay Global Financial Services Ltd entered “59 erroneous orders which resulted in multiple trades for an aggregate value of over Rs 650 crore [about US $126 million]… These non-algo market orders have been entered for an erroneous quantity which resulted in executing trades at multiple price points across the entire order book thereby causing the [market] circuit filter to be triggered.”

Emkay was able to unravel the trades, and close out its position, the Express story stated. Its trading on the NSE was also disabled; Emkay’s own stock took a beating once the NSE resumed trading, dropping 10 percent, at which point trading in its stock was suspended.

Earlier this week, the NASDAQ had its own trading uffda, but this time caused by yet another trading algorithm gone wild. As told by the Wall Street Journal, some twenty seconds after the NASDAQ opened on Wednesday at 0930, “sales in Kraft's shares bounced back and forth between levels that were more than $7 apart, without hitting any prices in between. That gulf, known as the ‘bid-ask spread,’ was far wider than those typically seen in stocks like Kraft.” This all occurred in a span of 5 seconds, which, as the WSJ stated, is “a long stretch in a largely electronic market dominated by computers that measure trading times in millionths of a second.”

A story in the Financial Times of London reported that the NASDAQ determined within an hour that the trades were clearly erroneous and cancelled them. The trades also affected other exchanges, including NYSE Arca, Direct Edge, and BATS, which all agreed to cancel the trades.

The FT cited Eric Hunsader, chief executive of Nanex, a market data company as saying “the problem appeared to be an algorithm that was trying to buy 30,000 shares in Kraft but did not want to skew the market by buying them all at once. ‘The trades were spread out by milliseconds and look to have executed at 11 different trading venues.’ ”

The NASDAQ has declined to name the trading company involved or what action it is taking as a result. The most it would say that the exchange system worked as designed.

In a bit of irony, on Tuesday, the U.S. Security and Exchange Commission (SEC) hosted an industry-government roundtable of leading equity market participants to discuss the recent spate of high-frequency trading glitches. SEC Chairman Mary L. Schapiro said that so far, investigations in the glitches show that they are the result of “basic technology 101 issues.” Schapiro implied in her remarks aimed at industry that if these glitches continue and cause “collateral damage to investors and their confidence in the integrity and stability of our markets,” the SEC will take action that the exchanges and equity market participants won’t likely enjoy. 

There was no comment by Schapiro on the Kraft trading glitch the day after her not so subtle warning to industry to get things sorted.

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