US exchanges were forced to cancel erroneous trades in Kraft on Wednesday, just one day after the company fled NYSE to re-list as two separate companies on Nasdaq OMX.
After opening the day at US$45.55, shares in Kraft jumped as high as US$58.54 in a matter of seconds. The sudden rise compelled six US exchanges to review and cancel trades priced above US$47.82, as per SEC rules.
“Trading in Kraft was affected by a broker error that impacted multiple stock exchanges. Nasdaq’s systems performed normally and the industry’s process for handling these issues worked as intended,” said a Nasdaq OMX spokesperson.
Under SEC rules, trades in stocks priced between US$25 and US$50 will be considered erroneous if they deviate by 5% from the circuit breaker trigger price.
However, circuit breakers only come into effect after the first 15 minutes of continuous trading, something the SEC has been urged to revisit following a glitch which caused market maker Knight Capital to lose US$440 million shortly after the open of trading on 1 August. The fact that the erroneous Kraft trades were a result of a broker error also suggests pre-trade risk controls – mandated by the SEC following the 6 May 2010 flash crash and also a point of contention during the Knight glitch – may not have been properly operating.
On 1 October, Kraft completed the switch of its listing from NYSE Euronext to Nasdaq OMX after a reorganisation of its business into two separate firms – Mondelez International and Kraft Foods Group.
The company said the decision to list the entities on Nasdaq OMX would “yield greater cost efficiencies, while providing visibility advantages for the company's iconic brands”.
Fragile markets
The incident is yet another stain on the faltering US market structure, which has been subject to a number of high-profile failures this year.
In May, the hotly-anticipated IPO of social media company Facebook was delayed by 20 minutes after Nasdaq OMX experienced technology troubles preventing it from setting an opening price, while BATS Global Markets was forced to cancel its IPO – the first on its own brand-new listings service – after a software fault. There have also recently been a number of instances where exchanges have been required to break trades, such as on 22 August, when the share price of Peet’s Tea and Coffee rose by almost 5% in a matter of seconds.
On 2 October, the SEC held a market technology roundtable to assess the issues that continue to plague US markets since the flash crash.
“There are issues around market structure and the conduct of market participants that we should further examine, including the high volume of cancellations, a proliferation of order types, transparency, high frequency trading generally, potentially manipulative trading strategies, and data latencies for public investors – to name a few,” said SEC chairman Mary Schapiro. “These issues still require attention and we are committed to addressing them.”
Schapiro also suggested the recent IPO failures were a result of “basic technology 101 issues” rather than complexities or fragmented markets.