The New York Stock Exchange on Wednesday blamed a manual error for causing chaos during the previous day’s market open that led to the cancellation of thousands of trades.
Two-thirds of NYSE-listed securities started trading on Tuesday without having held an auction to determine their opening price, leading to sudden swings in many blue-chip stocks and mass confusion among traders.
The exchange confirmed on Wednesday morning that it would cancel more than 4,300 trades in 251 different stocks.
Shares in big, well-known companies, such as AT&T and Wells Fargo, experienced huge surges or plunges in value as markets opened, before trading was halted seconds later. A total of 84 stocks hit limits that are designed to stop securities from trading at extreme prices.
In a separate update on Wednesday morning, NYSE also said that 81 stocks, including Morgan Stanley and Snap, had “erroneously” had short-selling restrictions applied.
“I haven’t seen anything this crazy technology-wise in 30 years in the industry,” said one trader who works on the NYSE floor. “It was pretty chaotic.”
NYSE chief operating officer Michael Blaugrund said on Tuesday evening that “such events are extremely rare”, and Wednesday’s market open went smoothly.
The company said the source of the problems was a manual error involving its “Disaster Recovery configuration”, which is designed to keep the exchange running during times of crisis.
The Securities and Exchange Commission said on Tuesday that it was looking into the problem. The regulator in 2014 introduced new rules to crack down on technology glitches at exchanges, and NYSE was the first group to be fined under the regulations four years later.
James Angel, a finance professor at Georgetown University’s McDonough Business School, predicted NYSE would eventually be fined over the failing. He said he had experienced a similar problem as a board member at Direct Edge, an exchange group that later merged with Bats, which was later bought by CBOE.
“Something went wrong, which should not have gone wrong, and the SEC expects you to have policies and procedures in place and to enforce them to make sure these things don’t happen. When they do happen, they will come after you and punish you.”
Although the exchange cancelled thousands of trades that were executed immediately after the open, Angel said the full number of trades that were indirectly affected by the mistake would be much higher. That could lead to litigation and arbitration from those affected.
“Suppose you were an arbitrageur who steps in when prices are out of line. You buy at a good price and then sold it later. Then several hours later the exchange comes back and says ‘we’ll bust the trade you bought, but not the one you sold’ — now you have a net short position and may be in violation of [other regulations].”
NYSE said on Tuesday that affected firms could claim compensation under a rule that deals with “clearly erroneous” trades. Under the terms of the rule, however, the exchange only sets aside $500,000 per month to settle such claims, plus a “supplemental allotment” of an undisclosed size. If compensation claims in a given month are more than the total available in the funds, claimants will receive only a proportion of what they are owed.
NYSE declined to comment on whether the funds would be enough to make whole every firm affected by Tuesday’s errors.
Tuesday’s error came shortly after the regulator announced plans to direct a greater proportion of trades through auction systems at exchanges, and was leapt on by opponents of the changes.
Jesse Forster, head of equity market structure at Coalition Greenwich, said using Tuesday’s problems as an argument against the SEC’s proposals was “comparing apples to oranges”, and one issue should not mean “we need to go and revamp our entire US market structure”. However, he said the error “couldn’t have come at a worse time optically” for NYSE given the increased focus on auctions.
Shares in Intercontinental Exchange, which owns NYSE, closed 0.2 per cent higher on Wednesday in a session in which stocks broadly recouped early declines to help the S&P 500 close fractionally lower.