Monday, October 18, 2010

NYSE Breaks Trades Of S&P 500 ETF At 9.6% Below Opening Price

¹²NYSE Breaks Trades Of S&P 500 ETF At 9.6% Below Opening Price

By Michael P. Regan and Nina Mehta | 18 October 2010

A software update at NYSE Euronext's Arca platform triggered what appeared to be a 9.6 percent plunge in an exchange-traded fund that tracks the Standard & Poor's 500 Index, a drop that would have erased $7.9 billion from one of the most popular securities in the U.S. Data published by the electronic venue at 4:15 p.m. New York time showed the SPDR S&P 500 ETF Trust at $106.46 compared with its opening price of $117.74. The apparent plunge in price involved 7.2 million shares in the closing auction on NYSE Arca, according to data compiled by Bloomberg at 4:30 p.m. The S&P 500 rose 0.7 percent to close at 1,184.71 today.

The glitch in the exchange-traded fund, which has a market value of $83.3 billion, comes as federal regulators are trying to restore confidence to equity markets following the May 6 crash that erased $862 billion of share value in 20 minutes. Data showing the decline appeared just as Apple Inc. and International Business Machines Corp. were releasing quarterly profit statements. "It was a mess and it was alarming that it could happen," said Andrew Ross, a partner and global equity trader for First New York Securities LLC, who trades ETFs. "People were very focused on after-market trading because of IBM and Apple earnings so it was very confusing when the price discrepancy happened. But people quickly recognized it was a bad print."

Auction Glitch

NYSE Arca said the ETF's official closing price will be recorded as $118.28, a 0.5 percent gain from its Oct. 15 close. The exchange operator said its 4 p.m. closing auction in securities listed on NYSE Arca was delayed for 15 minutes because of an issue with a software release. Auction prices occurring at 4:15 p.m. will be the official closing price for all other securities except for the SPDR S&P 500 ETF.

NYSE Arca will "bust" all the $106.46 trades, according to an e-mail from exchange spokesman Raymond Pellecchia. The fund managed by State Street Global Advisors is one of the most heavily traded securities in the U.S., averaging 112.2 million shares a day this year, data compiled by Bloomberg show. "The issue has been resolved," Pellecchia said in an interview. "Operations will be normal tomorrow". Marie McGehee, a spokeswoman for State Street Corp., declined to comment.

Trading in another security linked to the S&P 500, the E-Mini futures contract traded on the Chicago Mercantile Exchange, helped start the May 6 crash that briefly sent the Dow Jones Industrial Average down 998.5 points, according to regulators. A mutual fund company's automated sale of the contract without regard to price and "hot potato" trading by computer-driven firms set off the rout, according to the Securities and Exchange Commission and Commodity Future Trading Commission report.

Algorithmic Trading

The 104-page study released Oct. 1 said trading software using a mathematical model algorithm which linked the rate at which it traded the E-Mini contract to overall market volume sparked the selloff. Its initial sales spurred a flurry of buying and selling among other high-frequency traders, which in turn led the algorithm to sell still faster. SEC Chairman Mary Schapiro is trying to protect investors in a fragmented [[fractured?: normxxx]] U.S. stock market while maintaining liquidity on exchanges dominated by firms that profit from computerized trading. The May crash prompted exchanges to implement circuit breakers that pause trading in more than 1,300 securities during periods of volatility. Policies for canceling trades and eliminating stub quotes, or bids and offers at prices far away from the stock's last sale, have also been proposed or adopted by the various exchanges, but uniformity is still lacking.

Other 'Busted' Trades

Nasdaq canceled more than 50 trades in Progress Energy Inc. on Sept. 27 after the shares plunged 90 percent, triggering stock circuit breakers imposed after the May 6 crash. The exchange cited an "inaccurate limit price entered by a trading firm" for the mistaken transactions. Two weeks earlier, a 100-share order for Nucor Corp. that triggered a 99.98 percent decline was canceled by the CBOE Stock Exchange. Nucor fell from $35.71 to 1 cent on the voided purchase, data compiled by Bloomberg show.

About 200 trades in Core Molding Securities Inc. were canceled on Aug. 26 after the stock plunged from above $4 to below a penny in two seconds after going untraded for the first 4 1/2 hours of the day. NYSE Amex, the Nasdaq Stock Market and Nasdaq's BX platform canceled all trades at or below $3.94.

[[It's getting harder and harder to pick off those novices entering orders "at the market": normxxx]]!



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