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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...
I bet we can make the two of them poor, while making the two of us rich.
wud
I wonder how a Virus Attack (Specially Crafted) on Wall STreet would play out.. Could be interesting.
(Or,maybe they run Norton SystemWorks... )
// instant - "I for one welcome our new Decaff Coffee-Flavoured-Coffee Overlords"
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.
... that the glitch caused SCOX to fall even more :)
start stocking up on toilet paper and gold coins!
I like microcars
Remeber being a kid and playing some game (like baseball or soccer)? What happened when someone really screwed up? or did something thinking they were allowed? You called "do over!!!"
That is the solution. On Monday morning, all of the trading managers go out on the floor, and start off the day by yelling "do over!!!" Every trader's account is reset to its pre-Friday state, and everyone is happy. Duh, it's so simple.
Lisa: Wow, Dad, you're surfing like a pro!
Homer: Oh, yeah! I'm betting on Jai-alai in the Cayman Islands, I invested in
something called "News Corp"--
Lisa: Dad, that's Fox!
Homer: [shrieks] Undo! Undo! [hits key, sighs]
$cat
and while the SEC and others do their best to proteect traders, mistakes do happen. This is part of the random process of the markets, and must be accounted for when making a trade, even on options markets.
If you lost money, sorry. Unless the SEC/others can prove that somebody is liable for the initial mistaken order, you lose. Tough. Trading is risky, and sometimes the risks are completely unforseen.
Support a few technologists in Washington.
This reminds me of a nugget.
The stock market is frail, and a fool's playpen. I remember hearing a story about a huge media barron, before the stock market crash that led to the great depression. The mogul was standing in this elevator and overheard busboys talking about how they were going to start playing the stocks. The millionaire immediately sold everything when he got to the office. His reasoning was that if two people who had no money were playing stocks, that they were a sign that the whole system was at fault and doomed. I forget who this person was, so if anyone remembers... hehe feel free to say.
The guy's logic is correct even to this day, imho. The big companies that go public hope that an infusion of cash will make them more profitable, but it usually ends up that they get to take a break on stockholder's money for a while until it's deadline time again and they have to scramble to make product/service X work.
The whole system is wrong.
Look at all the ads for investing these days. They all suggest that you trust them to make you money, and they have as selling points, how easy it is to make money. The easier it is, the more moot it is, imho.
There is no easier way than hard work.
Glitches are bound to happen. Remember when the grid went down this past summer? I would have suspected major losses then, but somehow it wasn't that bad?
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.
My first thought when reading the summary above was that this would be an easy problem if managed by a central, relational database system.
Simply "roll back" the transaction that failed, and the dependencies would cancel themselves out. But, then I realized that the current RDBMS model only allows for a single transaction - you can't nest them.
Also, transactions are private only - you cannot transact with data in the middle of another transaction.
Thus, you might have ACID compliance, but only with one level of "undo".
How hard would it be to create an RDBMS that supports infinite levels of "undo" or transaction/rollback.
Such that you commit transaction A, which affects rows 1,2,3, and 11. Then, another transaction B which affects (further) rows 2, 3, and 12.
Then, if you roll back transaction A, transaction B would be similarly affected. I dunno - the depencies may get rediculous - but it seems that this could and should be done at some point.
Bright idea? Or another noise from an unpleasant orifice?
Let me know what you think!
I have no problem with your religion until you decide it's reason to deprive others of the truth.
"There does not seem to be any way to gracefully undo such errors"
They wouldn't have to be gracefully undone, if there was a simple check to gracefully prevent them from being made.
W3 R Gr8Trades. All U base R belong to us. Nyaaaaa.
(Anyone entrusting a company named "Gr8Trades" to buy 5000 shares at $40/share should be spanked. $200,000 was theirs, now it's not.)
sigs, as if you care.
I think the people left holding the bag here are exactly the right ones: The ones who thought they were gonna make instant big profits.
Not only did think they had bought something something at far below its value, they then signed options contracts to sell what they had just bought at slightly below its regular price. They should have known something was fishy... why would anybody want to pay close to the normal price to them if the price had just plumeted? Why would anybody want to sell to them at far below the usual price?
The should have known that the rules of the game allowed for their trade to be undone, yet they committed to an options contract that couldn't be undone because if they had hesitated, they risked their "instant profits" going away... their fault.
/. write up:
There does not seem to be any way to gracefully undo such errors.
From the article:
Such losses would have been prevented if the markets had not resumed trading until a decision was made on which trades, if any, should be canceled. But with markets intensely competitive, trading resumed before officials had made their decisions. The losers were traders who were not responsible for the errors or the slow decision making.
But I guess hindsight is 20-20, right?
I say there's a real simple way to solve this, no logistic or legal mess. Make them make good on the original sell order. They, in turn, want to sue the software developer? Let them handle that on their own time and out of THEIR pockets.
--Leo
It was unusual to see the spread between buy and sell markets be more than a few cents. And with the software that let you see the position on NASDAQ and all the other order books simultaneously, that spread was getting even smaller.
So I find it puzzling that traders wouldn't realize something was amiss with a $20 spread on a stock. I'm sure they did realize it was amiss, and there was a strong possibility that NASDAQ would break the trade, but they figured they'd go ahead with the trade just in case they could make some money before it was broken. It was, they lost money, and now they're crying.
BTW: Somebody asked what NASDAQ's software runs on. Mostly they use Suns, although there are some Windows systems, and possibly some SGIs.
The next Cmdr Taco duplicate will be ready soon, but subscribers can beat the rush and see it early!
Pffft...Screw that! Start making a list of people who are stocking up on toilet paper and gold coins. This is anarchy baby!
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...
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.
accordinging to the article it's not entirely clear what happened.
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"There was some sort of system glitch," said Andrew Goldman, executive vice president of Instinet Group. "We are trying to figure out precisely what it was and who caused it. It appears that the result was an unintended effect on the stock in question."
Other market officials said that the sell order apparently went into an electronic loop, endlessly repeating. Then automatic systems sprayed those orders throughout the market.
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It disturbs me that no one seems to question this "of course". Your friend was wrong. He made an unjustifiable profit on a mistake made in good faith by the clerk -- a mistake he clearly recognized as such. What he did might have been legal but it was wrong. And yes, I'm the kind of guy who goes back to a store if I discover I've received too much change.
The Mongrel Dogs Who Teach
On Oct 2 2002, someone at a brokerage firm Bear Stearns entered a 4 million dollar trade as a 4 billion dollar trade and it wasn't doublechecked and caused most market indices do go down about a half percent DURING NORMAL TRADING HOURS during the last hour of trading.
& cp 1=1
This was widely reported in the financial press, and eventually the sell position was unwound.
Since the order was a sell order tied to a diversified holding, it caused this decline to happen with both the electronic Nasdaq exchange and also the auction-based NYSE.
"In October of last year, for example, a trader at Bear Stearns mistakenly entered an order to sell $4 billion in stocks instead of $4 million. And two years ago London's stock market collapsed after one hapless trader entered an extra zero into a sell order."
See
http://stacks.msnbc.com/news/945909.asp?0sl=-21
and
http://news.bbc.co.uk/1/hi/business/2294525.stm
for more details
Previous errors
Mistakes have been made in market trading before by other companies.
In May last year, London's FTSE 100 index dropped by more than 2%, after a trader typed 300m, instead of 30m, while selling a parcel of shares.
In 1998 a Salomon Brothers trader mistakenly sold 850m-worth of French government bonds by LEANING ON HIS KEYBOARD.
And at the end of 2001, shares in Exodus, a bankrupt internet firm, jumped by 59,000% when a trader accidentally bid $100 for its shares, at a time when its value was 17 cents.
Game: Player 'Donald J Trump' now has AI skill level 'experimental'.
Clancy was a bit simplistic there - it would be a hell of a rollback.
You don't seem to understand...
A better analogy is that you sold the orange for 20c, then after someone was locked into buying it, because they have already sold it to someone else, you tell them that the orange is only available for $1, because the orange you originally offered did not exist.
I'm gonna need a spec.
...is for buyers and sellers to all SLOW DOWN and pay attention to long term performance rather than minute-by-minute numbers which aren't real meaningful statistics anyway. Frankly anything outside the offical quarterly reports is speculation anyway! Simply allowing only 1 trade per 24 hour period per stock would fix many, many issues with the market right now. The "day traders" should be restricted to playing "numbers" with Magic:TG cards and Ty Beanie Babies....rather than mucking with our financial backbone.
Anyone that's done some control theory knows how to solve the problem --- just add some hysteresis into the feedback loop, ie. response delay in both directions.
:-)
All forms of instability are reduced in their effect by this means, so it doesn't matter whether the instability stems from human error, bugs, or system glitches arising from other things.
And exactly how would one do this? There's a ton of ways, and quite a few of them simply entail holding quoted prices steady for a mandated period, plus a few adornments.
There are much more creative ones around though which could probably work even better, like allowing only audio readouts in trading rooms so that info comes in slowly like in tickertape days, or the one I like best, allowing traders to use no equipment other than the morning's financial newspaper, plus a pen and notepad.
"The question of whether machines can think is no more interesting than [] whether submarines can swim" - Dijkstra
You ever try going back to a store and telling them you got too little change?
my sig's at the bottom of the page.
--You have to give them some props:
> The price plunged, falling from $57.50 at 10:46 a.m. to a low of $39.25 at 10:54 a.m. Mr. Goldman said that Gr8Trade officials noticed the trading and notified Nasdaq of a possible problem. A Nasdaq official, who declined to be quoted by name, said Nasdaq contacted the company and was told there was no news to explain the move. It halted trading at 10:58 a.m.
--Twelve-minute response time. That's better than I would ever have thought! Could have been a lot worse.
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== WolfriderV6 == I'm willing to admit that *I just might* be wrong... Are you??
1) Anybody who bought at those low prices knew something was
either a) very wrong or b) very bad news was out. This was
after all a $60 stock and they were now buying at $42.
Without going into detail, I find it impossible they lost
any money on options trades (no open exchange, prices were
much higher when they did reopen).
2) Similar things have happend at CBOT and CME on their
electronic stock index products a few times this past year.
Most recently, a trader was said to have entered a stop/loss
order in the less liquid Dow Jones futures for a very large
amount. As CBOT handles S/L orders natively (internally),
their system proceded to hit bids until the order was
filled. Those trading S&P futuers did notice what was going
on and started selling there as well, perhaps fearing a
terrorist or other news related item. The sell off was not
as far (500 Dow pts), in part because of the greater market
depth, and the fact nobody could figure out what was going
on. Trades were subsequently broken, hours later, on the
CBOT, but NONE were cancelled on the CME. This caused quite
a bit of pain for people who had s/l orders open which were
executed, for all intents erroneously. (no not me, but I do
know one who was). CME refused to cancel as the original
event did not occur in house.
To this day, I do not believe the order was entered in
error. I believe a hedge fund or other firm had a need to
buy, and buy large. What better way to get filled then to
trigger a large move in a closely correlated market (Dow
futures) where you know the majority of the trades will be
cancelled, and just sit on the bid in the other market
(CME) as people panic sell. And do not rule out collusion.