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Knight To Blame For Rogue Algo?

Wild volatility in Wednesday trading has stoked fears of another technology glitch that could further damage investor confidence.

Stock prices swung wildly in the opening minutes of trading on Wednesday, riling markets and driving exchanges to halt trading in a number of securities, while stoking fears that the volatility could be due to a rogue algo.

Coming on the shoulders of the botched Facebook IPO and the May 2010 Flash Crash, the highly uncanny volatility raised fresh concerns that a technology glitch is at the root of matter and could further damage investor confidence. As a result of previous incidents, regulators have already increased their focus on trading systems.

Heavy computer-based trading erupted when trading began, prompting the New York Stock Exchange to review trades in 148 different symbols.

According to Reuters, several market participants said the source of the problem may have been large orders that were meant to be filled throughout the day but instead were executed in a shorter time frame. Knight Capital was cited by several traders as a primary source of the unusual trades, leading some to fear that a rogue algo or fat-finger trade could be the culprit.

Knight saw a fifth of its own market value wiped out early on Wednesday. The WSJ reported that the firm, which is one of the largest trading firms in the U.S., told brokerages to send their orders elsewhere due to technical problems.

“An initial review by Knight indicates that a technology issue occurred in the company’s market-making unit related to the routing of shares of approximately 150 stocks to the NYSE,” Bloomberg reported that Knight spokeswoman Kara Fitzsimmons said in an email.

Reports of irregular trading raised concerns that trades had been accidentally duplicated via computer algorithms, rather than the problem being contained to one server as has happened in the past, traders told the Wall Street Journal.
Wednesday’s early volatility disrupted all the normal activities, Stephen Massocca, managing director, Wedbush Morgan in San Francisco, told Reuters.


“[…] Stocks are moving all over the place, they are weird, they are trading like millions of shares, 100 shares at a time, so something went haywire somewhere," Massocca said in the first hour of trading. Regulators have already been examining whether recent stock-market disruptions have been driven by technical malfunctioning in electronic-trading systems or by more fundamental problems with the “plumbing” of financial markets, the WSJ noted.

[Read: FIX Protocol Risk Checks Take Aim at Fat Finger Trades, Errant Orders to learn more.]

Wednesday’s market volatility came on the same day that NYSE launched its new 12-month initiative called the Retail Liquidity Program, which gives retail traders slightly cheaper prices than those available to institutional investors, and where shares can be traded before they reach the exchange’s trading floor.

The NYSE initiative, which essentially functions like a dark pool, is a direct challenge to firms like Knight Capital, Citadel and UBS who all run their own dark pools.

[Read: NYSE Goes Dark to learn more.]
A spokesman for NYSE Euronext reportedly said Wednesday that the system was functioning properly.

From the Wall Street Journal:

Traders described unusual price swings in some stocks early in the trading session amid a large number of buy and sell orders blasted across electronic trading platforms.
"Down here we're continuing to trade and use all the powers and rules and regulations we have to make sure trades are executed in the proper manner," said Jonathan Corpina, senior managing partner with Meridian Equity Partners, and a floor governor at the New York Stock Exchange.

Mr. Corpina said that the issue prompted volatility controls to kick in, pausing some trade. NYSE Euronext told traders in a notice that its staff were reviewing trades in 148 symbols, executed between 9:30 and 10:15 a.m. New York time Wednesday.

http://www.wallstreetandtech.com/electronic-trading/240004752?cid=nl_wallstreettech_daily&elq=c7a96861271142ddb88817fc74b921d2