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Markets Hit by High Volume: 'Stocks All Over the Place'
Electronic trading firm Knight Capital Group said Wednesday that a "technology issue'' in its market-making unit had affected the routing of shares of about 150 stocks to the New York Stock Exchange, where abnormal volatility roiled the markets in early trading.
Knight said in a statement that it had notified its market-making clients this morning to route NYSE-listed orders to other venues.
The company said over-the-counter securities and trading in its other businesses were not affected.
Shares of Knight [KCG 8.17 -2.16 (-20.91%) ], which said it continued to review the matter, were down 21 percent at $8.16 in afternoon trading.
Heavy computer-based trading at the market open caused several stocks to be halted and prompted reviews on trades in scores more.
New York Stock Exchange operator NYSE Euronext said it had experienced no systems issues.
The broader market was little changed, but the trading glitch quickly became the focus for traders.
Several market participants said the source of the problem may have been large orders meant to be filled throughout the day that were instead executed in a shorter time frame, with some saying it was handled in the first 15 minutes of trading.
"That has disrupted all the normal activities — stocks are moving all over the place, they are weird, they are trading like millions of shares, 100 shares at a time, so something went haywire somewhere,'' said Stephen Massocca, managing director, Wedbush Morgan in San Francisco.
"It appears to be dozens if not hundreds of stocks that have (seen) extremely high volume and extremely rapid movement,'' said Joe Saluzzi, co-manager of trading at Themis Trading in Chatham, New Jersey.
The volatility caused pauses in trading for five stocks, which appear to be unrelated: Corelogic [CLGX 23.0245 0.0245 (+0.11%) ], China Cord Blood [CO 2.60 0.13 (+5.26%) ], Kronos Worldwide [KRO 17.77 0.85 (+5.02%) ], Trinity Industries [TRN 28.80 0.80 (+2.86%) ] and Molycorp [MCP 16.98 -0.44 (-2.53%) ].
Trading in those names was much heavier than normal: Molycorp traded more than 5.7 million shares in the first 45 minutes of trading. The stock usually averages about 2.65 million shares daily, and it was one of the stocks halted due to excessive volatility.
Unusual volume was seen in a disparate group of stocks, including Lithia Motors [LAD 28.59 0.73 (+2.62%) ], where more than 4.3 million shares had already changed hands. The stock usually trades about 95,000 shares daily.
Among other stocks, Protective Life [PL 27.52 -0.39 (-1.4%) ] had already traded more than 10 times its usual volume, and Juniper Networks [JNPR 17.48 -0.05 (-0.29%) ] has already seen six times its usual daily volume.
Wednesday morning's stock snafu had a familiar ring to it - mysterious volume in trades that simply could not have been made by a human comes surging out of nowhere, causing brief but acute market mayhem.
By now, many players on trading floors have gotten used to the disruptions that can come from the highly automated new world of high-frequency trading.
But that doesn't mean they like it.
"This algorithmic trading is kind of out of control," Phil Silverman, managing partner at Kingsview Capital, said as officials at the New York Stock Exchange tried to make sense of what happened. "It seriously hurts investor confidence."
By mid-afternoon, no one still quite knew exactly why about 150 stocks experienced a blinding surge in market volume, causing momentary disruptions in the prices of nine Dow components and a slew of others across various categories.
Authorities involved in reviewing the matter said Knight Capital, a trading outfit that employs algorithms used in high-frequency trading, said it experienced "technology issues" with its market-making procedures.
Ultimately, the broader market reacted little to the disruption, which was limited by circuit breakers and mechanisms at the NYSE to help contain the damage of HFT mistakes.
Traders, though, have grown weary of the problems and say the high-speed environment has changed the market in a bad way.
"When markets would have a big move, when things were really crazy, I would go out into the street and talk to people and they knew. Now, you get these big moves and people just don't care anymore," Silverman says. "They don't want to be a part of it, the high-frequency thing. The algorithmic situation needs to be looked at. We need to understand it better."
Firms create algorithms to buy and sell stocks according to formulas and market conditions. The high-speed robots trade with each other, seeking in transactions that can take microseconds to capitalize sometimes on fractions of a penny in stock moves.
While proponents say the rapid trading helps create liquidity and price discovery, regular investors have been fleeing the market, in part due to macro worries and in part because they don't feel they can compete in the automated trading world.
Dave Lutz, the managing director of U.S. trading at Stifel Nicolaus in Baltimore, cautions investors not to over-react to events like the Knight mistake.
"A lot of people seem to think it was human error. At the end of the day it wasn't necessarily a failure of systems," he said. "It's not a reason for people to lose confidence in the markets."
Still, had a human presence been involved somebody at least could have flagged the Knight trades as improper and perhaps stopped them before they hit the market.
But Lutz counters that the mistake was nowhere on par with the May 6, 2010 Flash Crash, where an error caused the Dow to lose nearly 1,000 points in a few minutes, or any of the other recent trading fiascoes.
"On the surface, it doesn't seem like it's any of that," he said. "It seems like it was simple human errors, and that's been happening since they've been trading underneath the maple tree."
