On Thursday, NASDAQ announced that it was cancelling certain trades which occurred during a period when the stock markets appeared to be in free fall. The press release read,
NASDAQ has coordinated a process among US Exchanges and therefore, pursuant to rule 11890(b), NASDAQ, on its own motion, will cancel all trades executed between 14:40:00 and 15:00:00 greater than or less than 60% away from the consolidated last print in that security at 14:40:00 or immediately prior. This decision cannot be appealed.
There are so many amazing aspects to this episode. The media is focusing on the fact that some trades occurred at cents on the dollar, as in the case of Accenture (ACN) and Exelon (EXC). But what is shocking to me is how NASDAQ has arbitrarily determined which trades will stand and which get cancelled.
In this case they are playing god with investors’ money, in what appears to be a purely subjective decision. There has been no explanation offered as to the reasoning behind its “60% ruling”. And of course, as noted sternly in the press release, “the decision cannot be appealed.”
Those investors that were able to buy Accenture at 60% below the last print at 14:40 get to keep their profits. The investors that bought at 61% below the last print walk away empty handed – having their trades cancelled. So did the NASDAQ determine that a 60% drop in price was reasonable given the market circumstances and 61% was not?
At the very least those investors that bought at prices that were more than 60% below the last print should have their trades executed at the 60% price. These investors were alert and willing to take risks in the middle of a market meltdown. Stocks that dropped 70% or 80% were in some cases back to levels that were seen just in March 2009. Given the panic, why doesn’t the NASDAQ consider those prices to be reasonable?
It clearly looks as if the NASDAQ was trying to protect the interests of some institutions which lost large sums of money during Thursday’s collapse. These institutions likely did not have safeguards in place to deal with a lack of bidders. When their automated market orders hit the market in the absence of bidders, transactions were done at ridiculously low prices. But as NASDAQ has noted, there was no failure of their systems.
It certainly seems that the 60% ruling was made to limit the total amount of losses to panicked, careless, or negligent sellers. It is likely that some calculation of losses at various levels was made, and it was determined that 60% was acceptable. It would be nice to know if this sets a precedent going forward. For example, the next time the market tanks, is it best to enter your buy orders at 55% below the last reasonable price? That way when NASDAQ tries to cut losses for the seller, you still might be able to capitalize on a savvy decision.
It will be interesting to see if this debacle will be investigated by a government or regulatory body. In any case, it doesn’t smell right, and it is just another incident that helps to destroy investor confidence.
Disclosure: No positions in stocks mentioned.