• 05 Mar 2007 at 11:46 AM
  • Glitch

Did Reg NMS Cause The Glitch?

It seems we may never get to the bottom of the glitches last week. Wall Street and the business media have short memories, and it seems everyone has more or less moved on. That’s so last week’s story. “It’s starting to feel like beating a dead horse,” one business journalist told us last Thursday, a mere two days after the so-called glitches may have contributed to an upsurge in market volatility and caused trading problems.
Overshadowing last weeks trading problems is the Web-of-Wall Street insider trading scandal, as well as It the latest big NYSE screw-up story. But maybe the failure of the NYSE to incorporate certain exchanges into the “best price” requirements for Reg NMS–the deadline was today–is connected to last week’s glitches.
DealBreaker spoke with a former market regulator who said that it is possible that the problems with the electronic trading systems at the NYSE last week may have been caused by the attempt to comply with the requirements. NYSE John Thain has been very adamant that the NYSE’s trading problems were not caused by the hybrid system but by the so-called SuperDot system which carries orders to the trading floor. The former market regulator we spoke with, who has since ceased his work for the self-regulatory organization where he gained his experience in exchange regulation, said that sounds like exactly the kind of problem the exchange might have experienced if it was testing the system that routes trading orders to different exchanges in search of the best price. This “best price” routing is what Reg NMS requires.
This could also explain why the NYSE had to request a last minute extension for the implementation of Reg NMS on Friday. After extending the deadline twice

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

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

  • 01 Mar 2007 at 10:04 AM
  • Exchanges

Circuit Breakers, Trading Curbs: A Refresher

This infographic from the New York Stock Exchange is just about the clearest illustration of when the NYSE will put the breaks on a plummeting market. (Or a skyrocketing market, but that’s unlikely to be an issue today.) The circuit breakers don’t kick in until there is a 1,250 point drop in the Dow Jones Industrial Average. The “circuit breakers” halt trading for varying periods of time, depending on when the DJIA hits the trigger.
Interesting, a delay in the reporting of the DJIA, such as the one we saw Tuesday when the Glitch slowed down the computer systems calculating and reporting the market index, might affect whether circuit breakers are activated. A ten-percent decline will not trigger a halt to trading if it occurs after 2:30 PM, so a glitch which delayed the reporting until after that point might avoid the NYSE safeguards.
And, even as we’re writing this CNBC is reporting that trading collars–which do not halt all trading but are meant to curb certain arbitrage and computer-driven trading–are already in, with the DJIA down nearly 100 points.

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]

  • 28 Feb 2007 at 2:06 PM
  • Glitch

The Great Glitch Story Not Getting A Great Reception

glitch-logo.jpgSome of the wiser voices on the internets are pointing out that the Great Glitch story-line doesn’t exactly pass the smell test.
Eddy Elfenbein at Crossing Wall Street says:

One more word about yesterday: The sell-off was not caused by a computer glitch.
The sell-off was already happening. The glitch was in the accurate reporting of what was happening. This is Wall Street going through the looking glass. If stocks are going down, and no one reports it, are they really going down?
When the computers finally caught up with the trades (see video), some traders thought it was an obvious misprint. No, everything until that point was incorrect. Only when they learned what they really had been doing did they start to panic. At which point, stocks started to rise.

And over at the Big Picture, Barry Ritholtz agrees:

First off, computer errors didn’t cause the sell off — they only delayed the reporting of the trades.
If anything, these delays made the sell off look more orderly than it really was. Contrary to what you may have read elsewhere, the glitch only made the selloff look more mild (orderly and less severe) until it turned more wild as the delays spooled out and unwound. I have seen several early news reports and comments that got this exactly ass backwards.
Anyone who will uses this as a false excuse for Tuesday is a weasel.

Wall Street Through the Looking Glass
[Crossing Wall Street]

Around the World in 24 Hours
[The Big Picture]

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]