The “August Algo Glitch”
Posted by Michelle Heath in Market Commentary, News, tags: algo, algorithms, alternative investments, Forex, NYSE, portfolio diversification
What better way to kick off the new month than with an awkward tech belly flop right in the middle of the New York Stock Exchange hustle and bustle? I really can’t seem to think of one.
Bright and early on the morning of August 1st, Knight Capital, one of the few select members of designated market makers (DMMs) for the NYSE, experienced some “technical difficulties.” Now everyone knows that when this stigmatic term is spouted off in any situation, it’s generally never a good sign – especially when it comes to a DMM for approximately 675 securities being traded on the NYSE.
In an end-of-the-trading-day recap released by MarketWatch, it was reported that Knights technological issues were allegedly causing erroneous trades to be placed on about 140 different securities, some of which were stalwarts on the equities front.
NYSE employees caught their first suspicious whiff of volatility at around 9:30 AM, which provoked both human interventions, as well as automated stop losses called “circuit breakers,” to be triggered. Though the Knight Capital tech spasms did manage some damage during their 45-minute stint, luckily no malfunction contagion escaped beyond the company’s market making unit.
The traditional image of utter chaos ensuing on the NYSE trading floor represents something different than we’re seeing now: actual humans matching buy and sell orders. Today, those orders are primarily all being executed electronically, which unfortunately leaves them susceptible to programming glitches. The repercussions from this don’t materialize so much in the tangible losses investors have suffered, but rather, in the toll they’re taking on investor confidence. After witnessing the Dow flash crash of ’10, the glitches devastating the BATS Global Markets and Facebook IPOs, and now, this algo blunder, its no surprise investor wariness is a concern.
It almost seems as though innovation has gotten a little too ahead of itself. Grandiose ideas are incepted, and technology is there to make them reality – sometimes even before all the glitches can be discovered and properly worked out. However, these issues are not unavoidable; all it takes is the right combination of innovators.
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