Slashdot Mirror
Computer Glitch Causes Havoc and Losses on Nasdaq
goombah99 writes "In an illustration of how fragile the electronic stock market system is the NY Times is reporting how a tiny computer glitch rippled through the Stock Markets with buyers who bought low and sold high taking huge losses. An erroneous large sell order was entered. Many people bought at this low price, then signed options contracts to sell these at higher prices, locking in a profit. Or so they thought utill the erroneous low sell order was removed. Now to honor their options they had to buy the stock at a higher price. Since exchanges trust each other's trade prices it rippled throughout the system. There does not seem to be any way to gracefully undo such errors."
What if some smart but malicious programmer rigged the system for his own profit? I know this example here is a glitch, but perhaps in the future...
In a Tom Clancy book (Debt of Honor, I think), a computer programmer takes advantage of a weakness in the stock market to induce a crash. After a week of the market shut down, they recover by resetting the prices to where they were the day before the glitch and instructing stock brokers on steps to avoid re-creating the crash.
It doesn't apply to this situation, but the specifics of how they do it is interesting for anyone who might want to check out the book.
I work for a firm that writes software for options traders and clearing firms. Sometimes system glitches do happen (or more often than not, a user error, like entering in the wrong price). However, when this happens and a trade occurs, it sticks unless both parties agree to bust the trade.
The fact that the trades were cancelled without permission from everybody involved in the trades is quite disturbing (because then it can set up precedence that any of your trades could be cancelled without you knowing about it, and that can really screw up your position).
Some people lose money because of mistakes, and some people make money because of mistakes...that's part of how the market works, and you should be willing to accept that risk if you're going to trade.
If it really was that bad (and a $20 difference is huge), and archipellago did screw up, they should take responsiblity and take the losses. If someone just entered in the wrong ask price, then that firm should take the responsibility. I know if our systems screw up our traders, then we mitigate those losses.
I have a feeling there might be some lawsuits in the near future if there were a lot of shares traded.
The system actually seemed to have worked pretty well except for the actions of th Archipelago market. There's no way to prevent errant data from making its way to the financial markets, so the question is what are you gonna do about it once it gets there?
What's supposed to happen is that everyone is supposed to stop trade in the stock while market officials try to sort out what happened. The NASDAQ did just that, and called the company involved to see if they had any news that would have justified the drop and they responded that there was no news. NASDAQ announced that their initial review indicated that there was errant trading going on, reserved the right to cancel the trades made before the halt, and released the stop. Within the hour, they confirmed the source of the problem, and revesed the errant trades.
Yet, while trading was still halted on NASDAQ, Archipelago undid their halt without any announcement that anything was wrong. This is wrong on two levels... not only did it falsely convince other people that the drop was for real, but it also pressured NASDAQ's decision-makers to hurry up, otherwise NASDAQ would lose trading volume to Archipelago.
So, the blame for this mess really belongs at Archipelago... they seem to have done an investigation that resulted in a verdict of no error, where in 20/20 hindsight we know there was an error on the play. Did Archipelago conduct a flawed investigation, or did they conduct any investigation at all? This was a case of the market's self-policing rules falling apart rather than any computer program...
Actually, Archipelago's the one to blame if you're gonna blame an exchange. Archipelago released the hold on the stock first, so most of the people who thought they were making an instant-profit by buying when it was low and selling minutes later turned out to be the instant losers. Archipelago's actions seemed to indicate the morning trades were going to stick. When the NASDAQ released their hold, they did so with a warning that anybody who had bought low in the morning should stand by because it was likely their trades were gonna be undone, and within the hour the NASDAQ followed through with the cancelations.
.com-like stock market out of existance, NASDAQ's hands are clean...
So, sorry money hungry lawyers... you'll just have to settle for suing a
Nobody knew it was a bug at the time. They simply saw the price dropping dramatically and decided to take a risk and bet on a price rebound. It was only after the halt and after the resume and *after* these people sold what they though they had bought that NASDAQ decided to cancel the orders.
Daytraders often buy on dips, betting that the stock is being oversold. This is a decent strategy, since often the reaction to bad news is more extreme than the news warrants. So, the stock dips suddenly, then regains a lot of what it lost. This is risky, because sometimes it turns out that news was even worse than initially reported, and the stock goes down even more. Daytraders understand this risk and accept it.
However, NASDAQ has introduced an entirely unprecedented risk -- that your buy order may be cancelled with no notice after you have already sold it forcing you into a short position that you did not intend.
Take this scenario:
10:55 AM - Investor sees huge dip in stock, enters BUY order for 1000 shares
10:56 AM - Investor gets confirmation from broker that he bought 1000 shares at $40, total price $40,000 (plus fees)
10:58 AM - Stock is halted
11:19 AM - Stock resumes trading, price starts going back up
11:55 AM - Investor puts in SELL order for 1000 shares
11:56 AM - Investor gets confirmation from broker that he sold his 1000 shares at $50, paying $50,000 (minus fees). That's a profit of $10,000.
12:28 PM - NASDAQ announces cancellation of all trades between 10:46 and 10:58 AM.
12:30 PM - Broker adjusts Investor's account to remove cancelled BUY order from 10:55 AM. But the SELL order was not in the cancelled time frame. Investor now has -1000 shares of stock and must buy to cover the debt.
12:35 PM - Investor enters BUY order to cover the 11:30 SELL.
12:36 PM - Investor gets confirmation from broker of BUY at $55 per share, total cost $55,000. Since the shares were sold at $50/share, that's a loss of $5000, due to NASDAQ's cancelling after the fact.
If NASDAQ had announced it was cancelling transactions before resuming the stock, the investor would not have entered the SELL order in the first place, and the whole thing would have been a wash. That would be the fair way to handle it.
The same thing happened in the 90's. I read an article about how states which, during the great depression, had passed laws forbidding governmental organizations from putting money in the market were now repealing those prohibitions. Well, if Depression-era legal prohibitions were being repealed, then the market was due for a crash. Unfortuately, my prediction was a good two years eary, but oh well.
"The question of whether a computer can think is no more interesting than that of whether a submarine can swim" -EWD
There is a science to investment. You just have to know how to read numbers, know how a corporation works, understand how trading works and understand what you are buying.
Stocks were never meant to be traded as speculation on the share price. Purchasing stock is purchasing a share of a company's future earnings in the form of dividends. This is why people who invest long term make more than people who buy expecting to sell with a profit in the same week.
There are several stocks paying 5-10% real returns as dividends right now. Try getting that rate at the bank. The best CD right now might pay 2%, if that.
Business isn't willing to pay for products, innovation and careers, so we get brands, mortgage commercials and layoffs.
If it can be shown that NASDAQ's systems caused this, rather than a glitch in someone else's systems, then their action was taken as an act of self-preservation, and would not be tortious. If it was caused by a problem on someone else's system, though, it probably would be.
If, however, the failure was caused by NASDAQ's systems, the fact that safeguards were not put in place to detect such a runaway sell order qualifies as gross negligence on their part.
Either way, if that were the contractual agreement between the day traders and NASDAQ, it seems likely that NASDAQ is screwed. However, the text you quote above is clearly web site boilerplate information, and has nothing to do with the contractual obligations NASDAQ has regarding an actual sale of stock. Without those contracts and a solid knowledge of contract law in the state of New York, we're all basically guessing here.
That having been said, the odds do seem to lean in favor of NASDAQ being found to be negligent, and thus at fault, IMHO.
120 character sigs suck. Make it 250.
Clancy was a bit simplistic there - it would be a hell of a rollback.