How the NYSE Trading Floor Prevented a Big, Erroneous Trade Today

Now and then, I talk about how having market professionals interact on a physical trading floor (as well as interacting electronically) not only helps price discovery but also provides a needed check against trading errors. A perfect example of this occurred this morning.

My colleagues tell me that shortly before the open, a customer erroneously sent tens of thousands of orders in a lightly traded security -- one that on average trades fewer than 1,000 shares a day on the NYSE (NYX). Had our market been completely electronic, those orders would have just ripped though the stock, taking the price down until the mistake was discovered later, then probably being cleaned up with hundreds or thousands of trade cancellations.

Instead, a designated NYSE market maker spotted the aberrant orders before he opened the stock, and we held the opening until the firm could be contacted and the orders cancelled, without a single aberrant order being executed here. The security opened within the hour with no price impact.

When you're a primary listing market, it's helpful to have the added feature of human beings with affirmative obligations for ensuring fair and orderly markets, adding liquidity and a watchful eye when needed.

Hat tip to Frank DeGarcia, Todd Abrahall and Nick Brigandi for filling me in on this.

Comments

[Roger Knights:]

This is an area where artificial intelligence subroutines in an electronic market should be employed. They could hold up weird-looking trades until a human had green-lighted them. This sort of AI software is already used by credit card issuers to detect unusual buying patterns by a card-holder and get his OK (or not) by phone before more charges are rung up.

Aug 18 08:23 PM

[Marc Courtenay:]

Thanks for this insight. Why don't you write some more about the Market Makers and their roles. That would be fascinating.

Aug 19 11:12 AM

[Scarborough:]

Ray Pellecchia is vice president of Corporate Communications at NYSE Euronext. In addition to his work in Media Relations and Employee Communications, Ray oversees the company's blog, called Exchanges (exchanges.nyse.com/)

Aug 20 11:43 AM