An automated stock-trading program accidentally flooded the market with millions of trades Wednesday morning, spreading turmoil across Wall Street and drawing renewed attention to the fragility and instability of the nation’s stock markets.
While the markets quickly recovered, it was the latest black eye for the financial markets and suggests that regulators have not been able to curb the market disruptions that have led to frequent halts in trading and wild swings in shares.
Wednesday’s debacle follows the botched Facebook initial public offering on Nasdaq in May and the aborted effort by another exchange, BATS Global Markets, to bring its own stock public on its own exchange. The episodes have further rattled the confidence of investors and stoked suspicions that markets are unsafe for savings.
“The machines have taken over, right?” said Patrick Healy, the chief executive of the Issuer Advisory Group, a capital-markets consulting firm. “When events like this happen they just reaffirm that these aren’t investors, these are traders.”
In the latest incident, the errant trades began hitting exchanges almost as soon as the opening bell rang and came from a single New Jersey broker that specializes in computer-driven trading, the Knight Capital Group. More than 100 companies, including big names like Alcoa, Citigroup and Ford, saw the prices of their shares suddenly spike up or down. The New York Stock Exchange later said that it would cancel the trading in six stocks that saw especially extreme movements.
The trades placed by Knight may have left the firm with millions of shares of overpriced stock, but the company did not comment on its potential losses. The firm’s own shares ended the day down almost 25 percent. Knight is one of many companies that have seen their fortunes rise as regulators made a series of changes over the last 15 years that have opened up the markets to new exchanges and trading firms that use computer programs to execute thousands of trades a second.
But the regulatory changes have also introduced instability, first exposed to the public during the so-called “flash crash” of 2010 when hundreds of stock unexpectedly plunged in value for no apparent reason. After that event, regulators set out to add safety valves to the system, but the turbulence on Wednesday reinforced the belief that regulators have not been able to keep up with growing sophistication and speed of the market they are overseeing."
Yes, let’s rely more and more on Wall Street to police itself.