Electronic Trading

Thain: There Is No Investigation! Hybrid Rocks!

thain.jpgApparently no one at the SEC tipped off John Thain that they are looking into the alleged problems with the hybrid trading system.

John Thain, head of the New York Stock Exchange, told CNBC’s Bob Pisani that there is no investigation by the Securities and Exchange Commission of trading problems at the the Big Board during Tuesday’s market selloff.
The comment, which Pisani mentioned on air, appeared to contradict a Wall Street Journal report earlier Thursday that the SEC is looking into whether the NYSE’s shift toward electronic trading affected its ability to handle a surge in trading volume.
Citing a person familiar with the matter, the paper said the regulators are concerned that capacity issues may have exacerbated the Big Board’s woes this week.

We assume that what Thain means is that the SEC has not launched a formal “enforcement action” against the NYSE. But it stretches credibility to say that the SEC is not at least looking into the alleged problems with the hybrid system, especially since those problems have received so much media attention in the last couple of days.
And that should just about conclude our “All Thain, All The Time” coverage. No one should really have to read that much about John Thain this early in the day.

CNBC’s Pisani: Thain Says No SEC Probe of NYSE Trading
[CNBC.com]

GlitchWatch: John Thain In Defense of Specialists?

nysespecialists.jpgReading the remarks of John Thain is the new Kremlinology.
As we noted in our earlier item, Thain defended the hybrid system yesterday. But one thing we didn’t get around to noticing until we re-watched the interview this morning is that hain defended not just the electronic aspects of the hybrid system but the human components as well.
“If anything I think that yesterday proved that we still need people here. And that’s really what hybrid is all about. And people were able to deal with, and really to overcome, the technical problems at the close yesterday,” Thain told CNBC.
Thain’s defense of the human element on the trading floor got our attention because it came on the heels of the announcement that Goldman managing partner Duncan Niederauer, who reportedly strongly favors moving to a fully electronic trading system, had been tapped to become a high-ranking executive at the exchange. There had been speculation that Niederauer’s arrival at the NYSE might presage a move to eliminate the specialists.
The hybrid system has been controversial, especially among specialists who trade on the floor of the New York Stock Exchange. Hybrid combines human traders with electronic trading and it’s introduction has led to a reduction in the number of traders on the floors of the exchange. Some specialists view the hybrid system as a sort of Trojan Horse for the eventual move to totally a automated, electronic system that would eliminate the specialists all together.
Some have pinned the blame for Tuesdays problems squarely on the electronic components of hybrid and the reduction of traders on the floor of the exchange. Traders we spoke to Tuesday evening pointed to this problem. And this opinion isn’t just confined to specialists (who obviously have an interest in blaming the electronic systems they fear may make them redundant). CNBC star reporter Charlie Gasparino also argued that the hybrid system was compromised by an inadequate number of specialists.
“One of the reasons why we had problems yesterday is because there aren’t enough specialists inside the hybrid working to make markets,” Gasparino said last night on CNBC’s “On The Money” program. “Ninety-percent of the time the electronic markets can work fine. You need specialists when you have these huge order imbalances.”

GlitchWatch: Was Thain’s Defense of Hybrid Pure Spin?

thain.jpgLate yesterday afternoon we reported on New York Stock Exchange chief executive John Thain’s interview on CNBC explaining why traders had been told to keep their books open past 4 PM.
But there was more than just that to the Thain interview. The NYSE chief also came out swinging—or what passes for swinging for the mild-mannered executive—in defense of the exchange’s hybrid trading system.
“There was no problem with hybrid at all,” Thain said.
Thain pinned the blame on a system called Designated Order Turnaround, or Dot, an older system that predated the hybrid trading system. DOT electronically routes certain orders to the floor of exchange.
But not everyone was convinced by Thain’s performance. Reuters quoted a Prudential analysts note as saying:
“Clearly there would appear to be implications for the hybrid system and questions of reliability,” wrote Prudential Equity Group analyst Rob Rutschow in a note, adding that, although the exchange claimed hybrid was not the issue, “NYSE may suffer damage to its reputation.”
CNBC reporter Charlie Gasparino described Thain’s remarks as “a lot of spinning.”

NYSE defends new system despite glitch

Feds Looking Into “The Glitch”

Federal authorities are looking into the Glitch, the Wall Street Journal’s “Heard on the Street” column reported this morning. Or at least one of the glitches. It seems that lawmakers and investigators at the SEC are wondering whether the New York Stock Exchange’s move to a hybrid system combining specialists on the trading floors with electronic trading may have contributed to Tuesday’s market downturn.

The New York Stock Exchange’s move into the electronic age happened almost overnight. Now the Securities and Exchange Commission is looking into whether it happened too fast and contributed to this week’s trading troubles.
Over the past year or so, the Big Board has shifted much of its trading away from its floor and onto an electronic platform, a move that many investors have embraced because it promises faster execution times in a business where time is money. In November, the NYSE announced it would close one of its five trading rooms, citing the potential to cut costs and because electronic trading requires fewer floor traders.
The SEC is examining whether the NYSE’s shrinking of the floor affected the NYSE’s ability to handle a surge in trading volume such as occurred during Tuesday’s market slide, according to a person familiar with the matter. The regulators are concerned that capacity issues may have exacerbated the Big Board’s woes this week.

[Editor’s Note: There’s no graphic attached to this item because we couldn’t find any pictures of electronic trading enthusiast Dunan Niederauer holding his head in is hands while being laughed at by men in funny jackets. And our graphics department doesn’t like to use photoshop before noon.]
NYSE’s Trading Overload Draws Attention of the SEC [$$] [Wall Street Journal]

The Vinnys Fight Back!

whenrobotsattack.jpgColor us skeptical when it comes to all the blather blaming yesterday’s sell-off on a computer glitch. Or glitches. Why? Because it seems the main thing that caused the computer glitch was so many sell-orders pushing through the system at once. If selling caused the glitch, how could the glitch cause the selling? Okay, maybe there’s a sequential, feedback loop thing going on here but isn’t it a little too soon to confidently point the finger at the robots?
The Wall Street Journal has some interesting reporting about what happened when the electronic trading systems broke down. Most the the tale, of course, comes from floor traders who, of course, mostly fear and loathe the robotic masters who are threatening their jobs. So you probably want to discount some of the “manual process which never breaks down” talk for self-interest from the people new NYSE executive Duncan Niederauer once reportedly referred to as “five guys named Vinny.

After the Dow problem was resolved, other woes bedeviled traders. About a half hour before the closing bell rang at 4 p.m. Eastern time, traders reported having problems sending electronic buy and sell orders to the NYSE, which recently began converting to a largely electronic system.
At one post on the floor, traders resorted to writing buy and sell orders on a dry-erase board. Most of the letters next to the stock symbols said “S,” for “sell.”
“Go manual if you can,” said Art Cashin, a longtime floor broker for UBS, to traders at about 4 p.m. “Take paper if you have to.”
Traders were still negotiating stock closing prices 10 minutes after the 4 p.m. close. “You’re done, 50 grand at 74.20,” Michael Rutigliano, a floor broker at the NYSE, yelled into his headset shortly after the markets were supposed to have been closed.
Mr. Rutigliano reflected the frustration floor traders are feeling these days, as their role becomes diminished by the electronic age. “We were able to revert to a manual process that never breaks down,” he said.
Louis Pastina, an executive overseeing trading systems at the Big Board, said “a rush of orders” in the last hour of trading overwhelmed the exchange’s computers, leading to delays and an unknown number of orders that were never completed. Some trades may have been done on alternative markets or in an after-hours crossing session the NYSE extended by a half hour to 5:30 p.m., he said. He added that floor traders were finishing trades manually until around 4:25 p.m., about 20 minutes later than usual.
A spokesman for the NYSE said the new hybrid trading system — which matches most trades electronically but sends some to traders on the exchange floor — worked fine, but that another system that feeds it couldn’t handle the onslaught of orders.


After a Rough Morning, A Data Backup Jolts The Blue-Chip Average
[$$] [Wall Street Journal]

wizfound.jpgWe’ve been trying to get to the bottom of exactly how many of these so-called computer “glitches” affected the market reporting and trading systems yesterday. Immediately after close, the Dow Jones Company was reporting one “glitch” in the system that calculates the various Dow Jones indexes while NYSE and NASDAQ were remaining mum.
But our trader friend was telling us about further problems, including a a slow down in getting trades processed. And now we’ve got the official report of a second glitch or a series of glitches caused by the high volume of trades.
From Bloomberg:

The sudden plunge fueled a wave of new orders that overwhelmed systems at stock exchanges in the final hour of trading. Warren Meyers, a managing director at NYSE brokerage Walter J. Dowd Inc., started scribbling trades on paper after the delays made it impossible to determine the fate of an electronic order. He ended up with more shares than he wanted.

So the official story seems to be that the high volume sell-off triggered problems with the Dow Jones systems, which then created an illusionary instant sell-off around 3PM, which triggered more selling and fouled up the electronic trading systems at the stock exchanges.
It’s a nice story if they can get it to stick. Pay no attention to the sell-off behind the curtain. Keep looking at the malfunctioning electronic images. And for godsakes keep that yappy little dog under control, Dorthy!
Bad Data Spur Market Doubts Among U.S. Investors [Bloomberg]

  • 27 Feb 2007 at 3:09 PM
  • Banks

Niederauer, For One, Welcomes Our New Robotic Masters

duncanniederaur.jpgWord hit last night that the New York Stock Exchange would as of right now be a wholly-owned subsidiary of Goldman Sachs and specialists would be scheduled for immediate extermination.
That, at least, was the reaction coming from a couple of specialists we spoke to today about the news that Goldman Sachs managing partner Duncan Niederauer had been named president and co-chief operating officer of the NYSE. He joins former Goldman president John Thain at the top of the exchange, and becomes Thain’s most likely successor as chief executive of the exchange.
But what really had tongues wagging on the trading floors was Niederauer’s enthusiasm for electronic trading, and possibly for eliminating floor specialists all together. Niederauer was the head of electronic trading at Goldman and was instrumental in arranging the NYSE merger with the electronic trading platform Archipelago, a move that many still see as the beginning of the end of the role of specialists on the trading floor. Prior to the merger, Niederauer sat on the board of directors of Archipelago.
As long as seven years ago, Niederauer was describing the situation of floor traders handling order flows as “an unsustainable model.”
On CNBC this afternoon, Charlies Gasparino described Niederauer as “one of the biggest advocates in electronic trading.” Gasparino also provided this bit of colorful background:
“This guy was advocating the replacement of the specialists with a computer because he basically thought specialists were inefficient and possible fraudulent. One time he said something along these lines to a high-ranking person at the New York Stock Exchange, “I don’t want five guys named Vinnie executiving my trades.”
This remark led then NYSE head Dick Grasso to treat Niederauer as an enemy of the stock exchange according to Gasparino, who described Grasso’s reaction as pronouncing Niederauer dead. Well, as they say, it seems as if stories of Niederauer’s death have been greatly exaggerated.
Gasparino also added that a move to completely electronic trading might not wait a few years from now when Niederauer might become the chief of the exchange.
“I think it’s going to be a lot sooner,” Gasparino said. “A lot of people on the floor are telling me it’s a lot sooner than two years. It’s possibly a year or a lot or even sooner than that.”

Goldman Partner Joins Top Ranks At NYSE
[Forbes.com]

Niederauer Is Clear Heir to NYSE’s Thain
[CNBC.com]