The SEC launches an investigation into the failure of the New York Stock Exchange that caused wild swings in prices

By James On Jan 25, 2023

Federal regulators are investigating a failure on the New York Stock Exchange that caused wild swings in blue-chip stock prices and resulted in the cancellation of trades in more than 250 stocks, including shares of Nike, Verizon and McDonald’s.

The NYSE, owned by the Intercontinental Exchange, said a “system glitch” prevented auctions on a subset of its listed shares from opening Tuesday morning.

Those shares began trading without an opening impression, or the price used as a benchmark at the opening bell, resulting in an erroneous price that the exchange said will be declared null and void, with resulting trades cancelled. .

The US Securities and Exchange Commission said it was reviewing the issue, which experts believe could have cost brokers and small traders tens of millions of dollars.

“Such events are extremely rare and we are closely examining the day’s activity to ensure the highest level of resiliency in our systems,” NYSE chief operating officer Michael Blaugrund said in a statement to DailyMail.com.

Traders watch screens for information about a trading malfunction on the floor of the New York Stock Exchange on Tuesday. Federal regulators are investigating a glitch on the exchange that caused wild swings in blue-chip stock prices.

Shares of Nike plunged 12% at the opening bell after a technical problem at the New York Stock Exchange prevented auctions of more than 250 listed stocks from opening.

Blaugrund added: “We ended the day with a normal market close and expect a regular open on Wednesday.”

A spreadsheet released by the exchange showed 251 affected stocks, including shares of Nike, ExxonMobil, 3M, Verizon, McDonald’s, Wells Fargo and Walmart.

The glitch is the latest in a series since the 2010 flash crash, and it angered traders who were unable to execute trades at the opening bell or saw their trades canceled after they were executed at the wrong prices.

“What appears to have happened is a technical glitch where all my open orders on the New York Stock Exchange were automatically cancelled, even though some of them should have been filled,” said Dennis Dick, a trader at Triple D Trading.

“They’ve fixed it now, but this is going to be a big mess to clean up.”

The exact cost of the fallout from the failure is unclear, but the cost to brokers and retail traders is likely to be in the eight-figure range, according to a person from a major brokerage who spoke on condition of anonymity because the matter is delicate. .

McDonald’s shares fell 9% in the first seconds of trading after the ‘system error’

A trader is seen during the glitch that caused the New York Stock Exchange to go out on Tuesday morning.

“Obviously, there were a lot of stocks that had major problems,” said Joe Saluzzi, co-head of trading at Themis Trading in Chatham, New Jersey. ‘It’s a bit of a mess.’

Saluzzi said there was ‘zero tolerance for fault’ among traders for failure to open and close key trades.

“This is a failure, there is no way to sugarcoat it,” Saluzzi said. “There are definitely people who are losing money today who are not happy.”

The opening auction bug comes as the SEC is considering routing most orders for retail shares through auctions, with the goal of getting better prices for individual investors.

“The SEC’s plan to make us all cool with consumer auctions leaves a lot to be desired,” said James Angel, a finance professor at Georgetown University.

Auctions are much more complicated than it seems. A lot of things can go wrong,” said Angel, who helped work on the auction process for Nasdaq Inc.

Stocks listed on the NYSE are listed on all 16 US stock exchanges, which use NYSE prices.

Saluzzi said having multiple exchanges doesn’t help in a situation like this, since the only place to trade an open order on a stock listed on the New York Stock Exchange is that same exchange.

Traders look at screens indicating that some stocks have been stopped on the floor at the New York Stock Exchange

The NYSE is the only major US stock exchange that still uses a trading floor, along with electronic trading, a hybrid model that the exchange says makes it easier to discover prices during market open and close and during periods of imbalance or trade instability.

Technical errors on exchanges can erode market confidence.

“I had some discretionary trading to do, but I opted to wait an extra 30 minutes after things seemed to normalize to make sure there were no issues,” said Seth Hickle, a portfolio manager for derivatives at Innovative Portfolios in Indianapolis, Indiana.

To hold exchanges accountable for such failures, the SEC adopted a broad set of business continuity and disaster recovery rules called Regulatory System Integrity and Compliance (Reg SCI) in 2014.

In March 2018, NYSE was the first exchange to be fined under Reg SCI. The $14 million fine was related in part to a nearly four-hour suspension of operations in July 2015 that resulted from a faulty software implementation.

Wall Street’s Troubled History of Failures and Outages

The New York Stock Exchange suffered a technical problem at the open of trading on Tuesday that caused more than 80 stocks to stop for several minutes, creating confusion among traders about which orders were filled and where shares were being traded, and reminding the ‘flash crash’ of 2010.

WHAT WAS THE ‘FLASH CRASH’ OF 2010?

On May 6, 2010, as stocks were reeling from the financial crisis and in the early stages of what would become a nearly eleven-year bull market, the Dow Jones Industrial Average fell nearly 700 points in mere minutes, erasing briefly an estimated $1 trillion in market cap.

This led some market participants to voice complaints that increasingly automated trading posed systemic risk. Others saw such a shocking market crash as an outlier, and the cost of progress, which just needed additional guardrails to prevent a repeat. However, it drew comparisons to the Wall Street crash of October 1987.

WHAT WAS THE RESPONSE TO THE 1987 CRASH?

After the ‘Black Monday’ crash in 1987, the US Securities and Exchange Commission (SEC) ordered the creation of market-wide ‘circuit breakers’ that required a temporary suspension of trading. trading for every 10% drop in the Dow Jones, in what can be seen as a precursor to later rules. In 2012, the benchmark index for circuit breakers shifted to the S&P 500, and the percentage levels needed to trigger the cease of operations were lowered.

Unlike the Black Monday crash, the ‘flash crash’ was largely viewed as something that could have been prevented with more intervention and the SEC responded quickly with some minor corrections, along with a promise to investigate concerns about the stock market. increasingly complicated and fragmented values. . In addition, a special committee of experts made recommendations on how to prevent another accident.

One of the measures adopted in 2011 was for single-stock breakers, the suspension of trading for 5 minutes on any stock or exchange-traded fund (ETF) that moved more than 10% in less than 5 minutes. That rule was replaced in 2012 by the ‘Limit-Up Limit-Down’ regulation, which stops a stock from trading if it trades outside a specified range based on a moving price.

Meanwhile, in 2014, the SEC adopted a set of rules called Regulatory System Integrity and Compliance (Reg SCI) to hold exchanges accountable for such trade disruptions.

The ‘Limit Up Limit Down’ bands were adjusted after a trading session in August 2015 that saw more than 1,250 trading stoppages across 455 individual stocks and ETFs.

HAVE THERE BEEN OTHER PROBLEMS SINCE 2010?

There have been cases, of varying severity, since the 2010 crash where trading could not take place. One memorable interruption was the delayed debut of Meta Platforms, what was then Facebook, in its initial public offering. Others included a three-hour trading halt on August 22, 2013, and the August 2015 session in which trading was halted for nearly four hours.

The Chicago Board Options Exchange saw two outages in one week in 2013.

But until Tuesday’s glitch, major outages have been largely contained in recent years. Notable exceptions affected individual investors more than large institutions, such as the 2020 failures that affected trading at retail brokers Robinhood Markets and Interactive Brokers Group.