Despite recent high-profile glitches, US equity markets have shown resilience in combating market errors, with data showing the number of clearly erroneous trades has significantly dropped.
Last week, the true cost of key trading errors emerged, with Twitter selecting NYSE over Nasdaq for its IPO and the Securities and Exchange Commission doling out a fine to Knight Capital for its algorithmic disruption to markets last year. But, according to statistics compiled by the Financial Industry Regulatory Authority (FINRA), the markets are in better shape than previous years.
Speaking at a market structure conference in New York on Thursday, Thomas Gira, executive vice president, market regulation for FINRA, shared statistics highlighting a positive industry reaction to trading errors including the May 2010 flash crash.
“We’ve seen an 89% drop in the number of clearly erroneous trades since the first half of 2008 and a 55% drop since the flash crash,” Gira said, citing unpublished data compiled by FINRA.
The number of clearly erroneous trades, based on official filings brokers make to exchanges when they decide an order was executed in error due to their own systems, the exchange’s system, or another factor, has reduced with greater electronification of markets.
High-impact errors
Speaking at the conference run by the Securities Industry and Financial Markets Association, Gira contended that regulatory efforts such as limit up-limit down rules have had a positive impact on the market, but added the veracity of modern glitches was still a concern for participants.
“What’s different about today’s market compared to ten years ago is even if you had less number of snafus, they’re much more amplified now,” he said. “The challenge now is on how to stop the bleeding quickly in such a quick market, in addition to looking at single points of failure.”
In August, Nasdaq was forced to halt trading for three hours in what has been labeled the ‘flash freeze’, a play on words of the May 2010 flash crash, which sent the Dow Jones Industrial Average down 1000 points before recovering minutes later.
Other market errors include last year’s Knight Capital algorithmic trading error, in which faulty algos led to erroneous trades that cost the firm US$440 million as its share price plummeted, for which the SEC last week handed out a US$12 million fine.
Twitter’s selection of NYSE over Nasdaq also signaled that attracting of IPOs in a low-volume listings environment will also push exchanges to better monitor markets for errors and input safeguards to avoid high-profile glitches.
But, despite the possibility of such high-impact market errors, US equity trading volumes suggest investors have continued faith in market infrastructure as they hunt for alpha.
For September, trading in US equities tipped US$4 trillion, up on September 2012’s US$3.6 trillion, according to Thomson Reuters Equity Market Share Reporter. For the two leading US equity exchange operators Nasdaq and NYSE Euronext, September figures similarly show glitches have not dampened investor activity.
NYSE’s two markets traded US$1.03 trillion, leading Nasdaq’s US$656.7 billion traded, a modest increase on September 2012 figures, whenNYSE reached US$962.7 billion and Nasdaq US$643.7 billion in value traded.
The speed factor
Adapting to the likelihood of severe market glitches will be a cost of doing business in the increasingly interlinked world of US equity markets, suggested Andrew Upward, market structure analyst for research and execution brokerage Rosenblatt Securities.
Speaking alongside Gira on the ‘Shifting perspectives – what regulators want to know’ panel, Upward said regulators’ mandating that trading venues link up with one another under Regulation National Market System would inevitably lead to trading errors participants must become accustomed to.
“One system going down and producing odd information [affects] another system and there is a ripple affect” he said. “If we want the benefits of this complex system, and I do believe there are sizable benefits, then it’s something we’re probably going to have to live with.”
Market complexity, and the need for exchanges to compete with the growth of alternative trading venues, has also intensified the need to alter technology underpinning trading systems.
“[Previously] NYSE or Nasdaq had time to put [technology] changes in place. Now, with four major exchange groups, three other exchange companies and myriad dark pools, there’s a lot riding on getting a new innovation to market quickly,” Upward added.