Just one day after the SEC held a roundtable looking at how to prevent technology errors in the marketplace, Nasdaq and other exchanges are at the center of a new trading glitch. Several exchanges canceled trades in Kraft Foods after a trading error caused the company’s shares to soar nearly 30 percent.
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Initial investigations suggest the erroneous trades were due to a faulty trading algorithm.
From the Financial Times:
Initial investigations suggested the erroneous trades were the result of a faulty trading algorithm. The episode highlights concerns among some market participants that the speed of transactions, driven by technical advances, often leaves the market susceptible to potentially hazardous errors.
“That’s the problem with our market structure today, there is no room for any type of error,” said Sal Arnuk, co-head of Themis Trading and a critic of high-frequency trading. “These electronic trading systems and the HFT market-makers are set up to inflict the maximum amount of pain on any mistake.”
Kraft’s shares quickly retreated after the trades were cancelled and closed down 1.2 per cent to $44.87.
“Participants should review their trading activity for potentially erroneous trades and request adjudication through the ‘Clearly Erroneous’ process within the applicable timeframe for filing pursuant to the rule,” Nasdaq said in a statement.
Kraft said the company was looking into the situation but declined to comment further.
“Trading in Kraft was affected by a broker error that impacted multiple stock exchanges,” Nasdaq said. “Nasdaq’s systems performed normally and the industry’s process for handling these issues worked as intended.” The exchange declined to name the company where the trading error originated.
Eric Hunsader, chief executive of Nanex, a market data company, said the problem appeared to be an algorithm that was trying to buy 30,000 shares in Kraft but did not want to skew the market by buying them all at once. “The trades were spread out by milliseconds and look to have executed at 11 different trading venues,” Mr Hunsader said.
Nasdaq said the rules in place across the exchanges to deal with broker dealers’ clearly erroneous trades worked as they were designed. "This had nothing to do with a U.S. exchanges’ trading systems or a trading glitch. Clearly erroneous trades are not atypical," Nasdaq spokesman Rob Madden said. Other Kraft trades were broken on exchanges including BATS and Direct Edge.