May 21, 2013

Editor's Note: Shares of Anadarko Petroleum traded as low as a penny late Friday, raising concerns about how a stock with $45 billion market cap could lose so much value in a second. However, new rules meant to prevent a “flash crash” did not apply after 3:30pm. The New York Stock exchange cancelled rogue trades that occurred in the last second of trading that took the stock from $90 down to one cent in some trades. Anadarko stock ended Friday 2.2% higher at $90.03, reports the MarketWatch blog. What follows is a letter written by Themis Trading to the investor relations department at Anadarko.

Dear Anadarko Investor Relations department,

We are sure that you are aware that at 15:59 pm on May 17, your stock traded all the way down to $0.01/share from over $90 in just a few seconds before. These charts from Nanex show how your company can lose its entire valuation in milliseconds.

For a brief moment on May 17, your $45 billion company was basically worthless. Most likely some senior executives called your department and demanded answers as to why their company had plunged to $0.01 share. Back in the old days, if there was a problem with your stock, you probably would have just picked up the phone and called the NYSE specialist to find out what just happened. Unfortunately, you can't do that anymore since the role of the specialist has been replaced by automated market makers (otherwise known as high frequency traders). Nowadays, you need to be an expert on deciphering the plumbing of the stock market to figure out what just went on. You need to be aware of terms like LULD (Limit Up/Down), LRP (Liquidity Replenishment Points) and stub quotes (place holders). So what happened to your stock?

This quote from a February 2011 report of the Joint CFTC-SEC Advisory Committee which examined the Flash Crash best summarizes what happened to your stock:

“Indeed, even in the absence of extraordinary market events, limit order books can quickly empty and prices can crash simply due to the speed and numbers of orders flowing into the market and due to the ability to instantly cancel orders.”

Plain and simple, Anadarko suffered a flash crash. This event was similar to what happened to numerous stocks during the major flash crash back on May 6, 2010.

Apparently, all buy limit orders in your stock at the NYSE were exhausted and a market order sold to the lowest possible point. We find it odd, as you probably do also, that all limit orders in your stock were pierced through in a matter of milliseconds. We thought that $45 billion companies usually have deep and diverse limit orders from various style investors. Nowadays, however, limit orders are mostly placed by short term, hyper speed "liquidity providers" who quickly cancel at the sign of any trouble. Especially troubling is that your stock flash crashed right at the close. This means that many institutional investors who target the closing price were adversely affected.

Two things should have protected your stock from crashing: circuit breakers and the elimination of stub quotes. However, the new Limit up/Limit Down (LULD) circuit breaker system did not activate. LULD does not apply after 15:30 pm during Phase 1 of its rollout. Also, stub quotes which were supposedly banned by the SEC, were still in place and allowed your stock to trade at $0.01/share. The $0.01/share trades occurred on NYSE which used to have an LRP system that would have prevented this from occurring. But once LULD went into effect, NYSE removed their LRP system. Essentially, recently enacted stock exchange regulations left your stock unprotected.

[HFT Firms Flood DC with Donor Dollars]

As a public company listed on the NYSE, you must pay high listings fees. Is this type of reaction what you expect for those fees? Shouldn't a $45 billion company expect its stock to be traded in an orderly fashion?

Once again, the ugly under belly of the equity market structure has been exposed. Today’s “market makers” produce automated quotes that can disappear in a millisecond. Unlike the specialist of yesteryear, they have no obligation to maintain a fair and orderly market. The equity market is now comprised of automated, shallow and fragmented pools of liquidity that can disappear in an instant. Shouldn’t companies like Anadarko who pay large listing fees expect more from the equity market? Shouldn’t we as investors expect more? Please feel free to reach out to us if you have any questions or pick up a copy of our book "Broken Markets" to find out more details about the plumbing of the today's stock market.

Your friends at Themis Trading

ABOUT THE AUTHOR
Joseph Saluzzi is partner, co-founder and co-head of equity trading of Themis Trading LLC, a leading independent agency brokerage firm that trades equities for institutional money managers and hedge funds. ...