Errant Program Trade Seen As Cause of Knight Mayhem

Yesterday’s technical glitch in Knight Capital's software that roiled trading in 148 symbols listed on the New York Stock Exchange may have been the result of a “program trade” erroneously executed within the first few minutes of the market open, according to sources who spoke to Advanced Trading.

Traders have speculated that a computerized “buy program” that was supposed to stretch across the course of five days, executed in five to 10 minutes after the opening bell, according to a buy side head trader who requested anonymity because the issue was still under investigation.

On Wednesday Knight said the problem was due to a “technical issue” on its listed market-making desk that impacted the routing of orders to the NYSE.

However, Wall Street is attributing yesterday’s mayhem to a rogue algo that executed millions of shares in companies like Radio Shack, Best Buy, Bank of America and American Airlines as well as less well-known names, as reported by CNBC and other media outlets.

“That’s what caused the price swings and now they’re long or short these stocks at prices that are no longer available,” said a sell-side trader yesterday afternoon.

Electronic market maker firms like Knight rely on computerized models to determine the prices they will buy and sell at.

Yesterday afternoon, the NYSE announced plans to cancel trades in six stocks, including Wizzard Software, American Reprographics, Quick Silver, E House and China Cord Blood, that were affected by trading glitches stemming from Knight Capital Group's market-making unit earlier in the day, CNBC reported.

Some of the trades are ridiculous prints, said the anonymous buy side trader, citing Wizzards Software, a stock whose price is normally $4 spiked all the way up to $13 a share.

As a sign of the unusual activity, traders said that between 9:15 and 10:00 am, the NYSE floor had traded about 300 million shares on their floor. “That’s volume they don’t normally see until about 2pm,” said the buy side trader.

“The volumes were huge, overbought or over sold,” said a veteran sell-side trader on Wednesday, whose firm was among the brokers that were notified earlier in the day by Knight’s listed-market making desk directing them to route their orders to other venues. “Some of these stocks traded 10 times their normal volume,” said the sell-side head trader.

Meanwhile, Knight’s stock lost more than a third of its value yesterday as the market realized that the firm was long a lot of stocks, and had to work its way out of the positions, traders said.

The erratic trading stoked concerns about the high-speed automated markets going out of control and once again drew comparisons to the Flash Crash of May 2010. “It’s more computer driven than human driven,” said the sell-side trader yesterday. “Some of these stocks traded 10 times their normal volume,” noted the head trader.

Even though circuit breakers and humans at the NYSE were in place to detect the problem, the latest computer incident was expected to spook the average investor. “It’s a blow to investor confidence,” said the sell side trader." None of this ever good news,” he said, though it affected one exchange, which was some consolation.

Could this have been a rogue algorithm? "It could have been," said the buy side trader. It’s also possible that this was “a fat finger error,” in which where someone typed in the wrong number. He compared it to the day of the Flash Crash when Waddell Read executed an E-mini trade via an algorithm within a few minutes that was meant to execute over several days. “This had the potential to trigger a similar event,” but it didn’t, which is a testament to the circuit breakers that were in place and human interaction,” said the buy side trader.

That’s because the machines were not in total control. “People on the NYSE floor immediately saw that something amiss was going on because of the massive volume and price moves coming into their systems, suggested the buy side trader. “They were there to see that there was something drastically going wrong,” said the buy side trader.

While the buy side trader thinks that regulation is going in the right direction, since there are single stock and market wide circuit breakers in place, he is watching how this plays out. “You will see people calling for increased regulation of rogue algos,” the buy side trader predicted.

Ivy is Editor-at-Large for Advanced Trading and Wall Street & Technology. Ivy is responsible for writing in-depth feature articles, daily blogs and news articles with a focus on automated trading in the capital markets. As an industry expert, Ivy has reported on a myriad ... View Full Bio