NYSE (Photo: Wikipedia)
Amid all the focus on market structure these days, along comes a powerful, real-life example of how things should work.
Here’s Reuters’ John McCrank on what happened:
“At 3:59:59 p.m. Eastern time on Friday, a broker-dealer placed an order for [15 million] shares of Monster Worldwide, which was trading at $8.50 a share, with no offers in sight.
"Typically, when an order comes in at the close, NYSE has a procedure to go out and solicit contra-side interests to fill the order, but given the thin book for Monster Worldwide, something smelled off this time, said [Louis] Pastina [executive VP of NYSE Operations].
“The DMM (designated market maker) saw it, alerted the operations staff, the stock was halted, and the broker-dealer was contacted…”
"’They had a programming error, so we were able to prevent a disastrous situation,’ said Pastina.”
As McCrank goes on to explain, total trading volume on Friday in online job firm Monster Worldwide did not even hit 1 million shares. Had the 17-million-share order gone through, the stock, which had a buy imbalance of 17,000 shares, would have soared as the approximately 60 buy orders would have continued to automatically execute until there were no more offers. The buy orders would have been filled at mistakenly high prices, costing them hundreds of millions of dollars.
As an erroneous execution, it may have been subject to later cancellation, which would have let the buy orders off the hook. The sellers briefly would have been happy to sell at a mistakenly high price, only to have the trades erased. And had the sellers turned around and used the proceeds to buy something else, they would have been on the hook for big losses – what Pastina called a “compound error.”
Machines are unbeatable for speed and efficiency, but this is a timely reminder of what people are good at: judgment and accountability. There is an important role for those qualities in today’s highly automated markets, especially now when public trust in markets has been so shaken. The NYSE has a balance between man and machine. That’s what’s needed today and going forward, surely as it was needed last Friday afternoon.
Two quick editorial notes on this:
1) Reuters originally reported the order as 17 million shares. That’s what our staff had said just moments after the event happened, based on our best understanding at the time. Later, when the dust settled, everything was double-checked and the number of shares was revised to 15 million.
2) Respect to Reuters being on the ball late on a summer Friday – the story has yet to appear elsewhere – and to the Chicago Tribune, hometown paper of another major trading center, for picking up the story. Stories like this go a long way toward helping people understand how markets work, and how they should work.