1. The Infamous Flash CrashIt was May 6, 2010 at 2:42pm ET. Traders were deeply concerned about the Greek debt crisis (some things never change), the Gulf oil spill, and the sweeping impacts of approved regulatory changes. Then, they had the scare of their life.
In 20 minutes almost $1 trillion in market value disappeared and the Dow Jones Industrial Average plunged nearly 1,000 points. Bellwether stocks were reduced to pennies and investors began frantically selling at a loss. Then, just as quickly, at 3:07pm, the market recovered.
Fingers quickly pointed to electronic, or algorithmic, trading as the cause of the “Flash Crash” but a preliminary report issued May 18 by a joint committee of the Securities and Exchange Commission and the Commodity Futures Trading Commission (CFTC) determined that there was no evidence of trader error.
Regardless of the cause, it was clear the systems behind the market were fragile and flawed. And while this prompted many new rules and controls, as we go through this slideshow of trading glitches we have to wonder if all that much has changed. The market continues to become more complex, and the problems that plague it seem to keep pace.
2. BATS IPO BugOn March 23, 2012 the highly reputable exchange operator BATS Global Markets experienced a software bug that caused them to stop their own initial public offering.
Even though BATS spent months on internal testing and weeks of dedicated testing with its customers using test symbols, the technical glitch related to IPO auction software, was not previously detected.
“There was a unique scenario of different option/order types. We conducted the auction successfully but we had trouble transitioning from the auction to continuous trading and that is where the bug was exposed,” CEO Chris Isaacson had said in an interview with Wall Street & Technology.
The tech details came down to issues with symbol matching. BATS splits up the alphabet in 12 ways for scalability so the BATS symbol for the IPO was on the same matching engine for stocks with symbols A-BFZZ, explained Isaacson. Therefore, quotes and orders for symbols on the same matching engine including Apple Inc. [AAPL], were inaccessible, he said. The bug was quickly detected, shut down, and resolved within two hours.
However the hit to their reputation was done, and several financial giants committed to buying BATS cancelled their trades. The crushing blow dropped their opening IPO price of $16 down to $0.75 shortly after opening. Unsurprisingly, BATS decided to withdraw their IPO.
3. Nasdaq’s Facebook IPO SnafuThe world seemed to be sitting and waiting for the year’s (maybe the decade's) most anticipated initial public offering, Facebook. The social network of the people might also be the stock of the people, so not only did the ticker “FB” stir up strong opinions in Wall Street, but also Main Street. With all eyes on the market on May 19, 2012, the day of its IPO, the exchange that handled the listing, Nasdaq OMX ... well, let's just say they dropped the ball.
Nasdaq’s technical malfunction in its software and infrastructure caused delays in trading, which confused traders and investors, as well as the broker dealers trying to execute their clients’ trades. According to Nasdaq, it ran into problems when it was attempting to end the quoting period and execute the IPO Cross, matching buyers and sellers, and print the opening trade.
Further aggravating the confusion, Zuckerberg symbolically pressed the "IPO" button at 9:30 a.m, the stock began trading at 11:05, but was further delayed until 11:30am. "The delay appears to be related to Nasdaq's computer systems not being able to handle what seems to be historic levels of demand and historic levels of trading volumes for one stock in a small amount of time," commented Scott Sellers, CEO of Azul Systems.
The glitch resulted in more than $500 million in trading losses across major trading firms. Nasdaq has since fortified and tested the systems responsible.
Following the Facebook IPO, Tabb Group's "IPO Survey: Market Barometer" found that the impact of Facebook's IPO on investor confidence was almost as great as the Flash Crash. In addition, the survey found that 31 percent of participants said their confidence level in the US equity markets was weak or very weak and that the confidence level of respondents was lower than a similar survey TABB conducted in the wake of May 6 Flash Crash.
The technology issue in its market-making unit affected the routing of shares of about 148 stocks to the New York Stock Exchange. For example, a $4 stock jumped to $15. The chaos lasted only an hour. NYSE believes the only reason the damage wasn’t more widespread is thanks to its circuit breakers.
The snafu cost Knight a cool $440 million in pre-tax losses and nearly destroyed the company. Before the infamous breakdown Knight was the largest trader in U.S. equities, with nearly 17.3% market share in NYSE and 16.9% on Nasdaq. In December of 2012 Knight was acquired by Getco LLC. The merger was completed in July 2013, forming KCG Holdings.
5. CBOE Mysterious Software ProblemOn April 25, 2013 a glitch at the Chicago Board Options Exchange, the largest U.S. options exchanges by volume, closed trading until 12:50pm ET.
“This was a software bug. It wasn’t any sort of hacking incident and these things happen with a software company,” CEO William Brodsky had said to CNBC. However, CBOE has been somewhat vague about the nature of the software problem. When pressed by CNBC, Brodsky said this was not a software upgrade and that the exchange did not violate any SEC procedures.
6. Everbright Securities’ Flash SurgeTaking a moment to broaden our scope of trading glitches, we’ll quickly see these issues plague more than just U.S. exchanges. On August 15, 2013 China’s state controlled brokerage, Everbright Securities, saw a surge in trading volume on the Shanghai Stock Exchange. The index went up 53% and reached its highest levels since 2009.
Shares of Everbright were suspended from trading and the brokerage is now under investigation by China’s Securities Regulation Commission.
Everbright is a brokerage part of group made up of hotels and financial firms. The nature of the error is still unclear – was it human or technical? However, traders suspect this “flash surge” is related to Asia’s continued adoption of high-frequency trading.
[China’s Everbright Stops Trading After A Surprise Flash Surge ]
7. Goldman Sach’s Trading GlitchOn a sunny August 20 of this year, Goldman Sach’s electronic trading system “sent out erroneous single stock and ETF options trades to a host of American exchanges,” reports WS&T’s Phil Albinus. “Those exchanges include NYSE Euronext, CBOE, and Nasdaq OMX. Representatives from those exchanges told the Wall Street Journal that those trades would be "busted up" by the end of yesterday's trading and into this week.”
Here are the details: Goldmans’ electronic trading systems sent out erroneous single stock and ETF options trades to a host of American exchanges yesterday morning. Those exchanges include NYSE Euronext, CBOE, and Nasdaq OMX. Representatives from those exchanges told the Wall Street Journal that those trades would be "busted up" by the end of yesterday's trading and into this week.
The snafu could cost Goldman up to $100 million, which would not include any fines regulators could add as they look deeper into the mess.
8. Nasdaq’s Flash FreezeOn Thursday, August 22, 2013 NASDAQ OMX called for a halt in trading after it was discovered price quotes were not being disseminated properly. The glitch shut down the exchange for 3 hours, despite reports that the problem was identified and resolved in the first 30 minutes. Trading continued as usual once the exchange was restored.
The incident, which lasted between just after noon until 3:15pm is being called a “flash freeze.” The extent of the trading loss remains to be seen, and the industry is debating the consequences for Nasdaq, both in fines and reputation.
According to The Wall Street Journal, "Nasdaq officials internally pointed to a "connectivity" problem with rival NYSE Arca," but that Nasdaq's team should have been able to remedy the issue and avoid a halt in trading.
9. & 10. Nasdaq’s Squirrel ProblemOn December 10, 1987 The New York Times reported, “An adventurous squirrel touched off a power failure in Trumbull, Connecticut, that shut down the National Association of Securities Dealers' automatic quotation service for 82 minutes yesterday.”
Tragically, the squirrel lost its life and an estimated 20 million shares were prevented from trading before power was restored at 10:43AM. At the time, this trade volume was more impactful. Today, average trade volume is much more than the 130 million in 1987.
In 1994, the bushy-tailed assailants struck Nasdaq’s Trumbull computer center again. This time, a squirrel chewed through a key computer cable, causing a dip in power that closed the exchange for roughly 30 minutes.
It is amusing to see that as we go back 26 years the problems plaguing our exchanges were infinitely simpler to explain than those behind the modern snafus.
Becca Lipman is Senior Editor for Wall Street & Technology. She writes in-depth news articles with a focus on big data and compliance in the capital markets. She regularly meets with information technology leaders and innovators and writes about cloud computing, datacenters, ... View Full Bio