Trading glitches

After the 2010 flash crash, and subsequently high profile snafus in cases, such as the Bats listing debacle, and the massive bungle in the Facebook Inc (NASDAQ:FB) IPO, can we really consider our markets safe?

Maybe not any longer, considering there has been another instance today of Wall Street falling prey to technological foul-ups at market maker Knight Capital Group Inc. (NYSE:KCG). According to this report, Knight had to request clients to take their business elsewhere. It may be recalled that Knight was one of the casualties itself in the Facebook Inc (NASDAQ:FB) IPO imbroglio, having lost about $35 million.

The SEC and the NYSE are reportedly investigating the problem at Knight, who said an initial review “indicates that a technology issue occurred in the company’s market-making unit related to the routing” of about 150 NYSE-listed shares. NYSE Euronext told traders in a notice that its staff was reviewing trades in 148 symbols, executed between 9:30 and 10:15 a.m. New York time Wednesday.

According to market participants, the problems may have been caused by errant algorithmic trading. The glitch resulted in heavy volatility in a group of about 150 shares, which reportedly witnessed a huge influx of both sell and buy orders. The extent of the problem can be gauged from the fact that Wells Fargo & Company (NYSE:WFC) Capital IX, preferred shares, traded almost four million shares compared to its normally inactive volume. Other prominent stocks to be hit were Citigroup Inc. (NYSE:C), Bank of America Corp (NYSE:BAC), and Amaerican Airlines. The algorithm which ran amuck is alleged to have bought and sold millions of shares for as long as 30 minutes, bringing untold volatility to the affected stocks.

The Herbalife Ltd. (NYSE:HLF) stock was another victim. Phil Orlando, chief equity strategist for Federated Investors in New York, which manages $370 billion, said, “The Herbalife Ltd. (NYSE:HLF) opened and went all the way down to $49. This stock should be going up because they just blew the quarter out two days ago. Our analyst is pulling his hair out — he had no idea what was moving this stock except for what’s going on at Knight.”

“We’re at a loss for words,” he added. “Knight has to tell us and the exchange what the problem is.”

Even Berkshire Hathaway class A and B shares were affected – with both trading abnormal volumes.

Shares of Knight Capital were mauled about 20 percent to $8.30 once the debacle became public.

According to one theory, the problem could have been caused by larger orders that were actually intended to be executed throughout the day, but instead were executed in a much shorter time, and likely within 15 minutes of the opening bell. A ‘fat finger’ error can’t be ruled out either.

Fingers are also being pointed at a new program being introduced today by the New York Stock Exchange today – the Retail Liquidity Program, meant to help retail investors get better prices on their trades. According to Matthew Heinz, an analyst at Stifel Nicholaus, and quoted by the NYT, the program “could have something to do with today’s confusion as market participants adjust to the new order types and routing methods.” However, a spokesman for NYSE claimed that the system was working properly.