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Posted on 6 August 2012 | 3,201 views

August 2012 Computer Glitch Almost Causes Repeat of 2010 Flash Crash

A technical glitch on the stock market caused sharp swings in dozens of stocks early Wednesday August 1, 2012 — causing confusion and disarray in the first hour of trading.

It was the latest breakdown in the increasingly complicated electronic systems that run stock trading, which have been showing signs of strain as more traders and big investment firms use powerful computers to carry out trades in mere fractions of a second.

Coming less than three months after a snafu tarnished the debut of Facebook, the latest bug on Wall Street threatens to further erode investors’ confidence in U.S. financial markets, experts say.

The problems began when dozens of stocks started moving up and down by wide margins for no apparent reason. Abercrombie & Fitch (Stock Symbol: ANF) jumped 9 percent within minutes, hitting $36.75 after closing the night before at $33.80. Harley Davidson (Stock Symbol: HOG) suddenly fell 12 percent, to $37.84 from $43.23. Wizzard Software (Stock Symbol: WZE) shot up above $14 after closing the night before at $3.50, according to data compiled by FactSet.

Unusual volume spikes occurred in a number of other stocks, including Bank of America (Stock Symbol: BAC), Alcoa (Stock Symbol: AA), Caterpillar (Stock Symbol: CAT) and Apple (Stock Symbol: AAPL) which has been involved in other “Mini Flash Crashes“, among others.

The culprit was Knight Capital Group (Stock Symbol: KCG) — Knight, which takes stock trading orders from big investors and routes them to exchanges, said in a statement that a “technology issue” had occurred that affected the routing of about 140 stocks to the New York Stock Exchange. Later in the day, NYSE said it was canceling faulty trades in six smaller stocks, including Wizzard.

Knight told its clients to send their orders away from its system and said it was reviewing the issue. The episode was an embarrassment for Knight’s CEO Thomas Joyce, who was one of the biggest critics of the NASDAQ stock market for the way it handled Facebook’s initial public offering.

Knight’s own stock plunged $3.39, or 33 percent, to $6.94 on Wednesday. Knight Capital Group’s stock rallied nearly 60% Friday August 3, 2012 — after online brokerage firms TD Ameritrade (Stock Symbol: AMTD) and Scottrade said they’d resumed routing trades through Knight’s system.

The trading problems served as a reminder of other miscues that have shaken investors’ faith in recent months:

– Facebook’s (Stock Symbol: FB) highly anticipated first day of trading on May 18 was thrown into chaos because of computer glitches at NASDAQ. The opening was delayed by half an hour. Many investors couldn’t buy shares in the morning, sell them later in the day, or even know whether their orders went through. NASDAQ is preparing to pay as much as $62 million to firms that were hurt from the glitch.

– In March, an electronic stock exchange called BATS Global Markets Inc. had to cancel its own initial public offering after a series of technical snafus prevented its stock from ever opening for trading. The CEO of the Kansas City-based company, Joe Ratterman, gave up his role as chairman and issued a public apology.

– In May 2010, the Dow Jones Industrial Average dropped nearly 600 points in five minutes because of technical problems, an event that was dubbed the “flash crash.”

Though Knight didn’t provide details on what happened, much of these glitches stem from issues related to the computers and algorithms that power the world of high-frequency trading, where millions of trades are conducted in nanoseconds. Most of the volume of stock trading comes from such computers. Because machines conduct these trades, the propensity of malfunctions is high, since humans can’t put a stop to these trades until it is too late, or the damage is already done.

Such glitches can hurt investors, especially those that may have had placed automatic orders with their brokers to sell stocks that hit a certain price.

The Securities and Exchange Commission was involved and looking into the matter — they maintain continuous contact with the NYSE and other market participants.

High Frequency Trading, the idea that computers and algorithms are trading very rapidly in the marketplace and putting pressure on the system.

The disruptions occurred, ironically, on the same day that the Securities & Exchange Commission published a final rule aimed at preventing trading disruptions like the May 2010 Flash Crash and the lesser known “1962 Flash Crash” — the new rule establishes a single, consolidated record of all the trades on a given day.

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