NYSE’s Tuesday trading glitch explained

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A trader works on the floor of the New York Stock Exchange. 

Peter Kramer | CNBC

The New York Stock Exchange experienced technical issues at the open Tuesday.  Dozens of stocks opened at prices well above or below their prior day closing prices. Most were halted shortly after the open under rules designed to damp down excessive volatility, and most reopened five to 10 minutes after the open at prices much closer to yesterday’s closing prices.

Stocks affected included big names like Altria, Mastercard, McDonalds, Uber, Wells Fargo, Verizon, Rio Tino, Shell, AT&T, Lilly, Mosaic, Wells Fargo, Nike, Nucor, Transocean, Prudential,3M, Newmont Mining, Southern, Union Pacific, Sony, United Parcel Service, Altria, Valero Energy, Occidental Petroleum, Royal Dutch Shell, MetLife, Visa, Walmart, and Exxon Mobil.

The Big Board, owned and operated by the Intercontinental Exchange, later issued a statement saying “All NYSE systems are currently operational.”

Just prior to 11:00 a.m. ET, the NYSE issued a second statement: “The exchange continues to investigate issues with today’s opening auction. In a subset of symbols, opening auctions did not occur. The exchange is working to clarify the list of symbols. Impacted member firms may consider filing for Clearly Erroneous or Rule 18 Claims.”

“Clearly Erroneous” means the NYSE would determine that the initial prices in the stocks affected were not valid trades and the NYSE would determine that a later price would be the “correct” opening price. 

What happened?

Every day, stocks open at the NYSE at or near 9:30 a.m. ET.  There is only a single opening price, which is determined by thousands of orders to buy and sell individual stocks. These orders are aggregated into a single “book” for each stock that gauges overall supply and demand.  A single price is then quoted at the open and all orders are aggregated into a single opening “auction print.”

For whatever reason, it appears that many orders to buy and sell stocks did not make it into the order book that determines the opening price, and that the opening auction print did not happen in those stocks affected.

The effect was that many stocks opened on very low volume and due to a supply-demand imbalance opened at prices far away from their closing price Monday.

To give two examples: Mosaic closed Monday at $48.35, but opened at $40.29, a drop of about 16%.  It was halted almost immediately, but reopened at 9:43 a.m. at $48.00.

Walmart closed Monday at $142.64 but opened at $159.88, a jump of 12%. It, too, was almost immediately halted and reopened at 9:40 a.m. ET at $141.51.

What will the NYSE do?

Initially, the NYSE hinted it may bust all the initial trades of companies affected when it said, “Impacted member firms may consider filing for Clearly Erroneous or Rule 18 Claims.”

Later in the day, the NYSE issued a third press release around the trading glitch that occurred at the open. The NYSE said 251 stocks were affected. These stocks did not conduct an opening auction. As a result, many opened at wildly different prices. Many were halted immediately due to volatility and reopened several minutes later at prices closer to the prior day’s close.

In the release, the NYSE indicated it was cancelling a small number of trades that occurred shortly after the open, and are marking other trades that occurred as “aberrant,” meaning they will be left standing but will not be calculated for the purposes of determining highs and lows.

So what happened?

At the open every day, limit up/limit down (LULD) bands are published immediately after a stock opens that determines at what price a stock will be halted due to volatility. If it trades above or below the bands, it is halted. At least 84 stocks at the NYSE were halted within seconds after the open due to volatility, triggering the LULD bands.

The NYSE said that all stocks affected by LULD halts that traded from the open at 9:30:00 and the first second after that traded outside the LULD bands are getting cancelled. They are considering marking all stocks affected by LULD halts after 9:30:01 to 9:30:45 (from 9:30 and one second to 9:30 and 45 seconds) as “aberrant.”  In an aberrant trade, the trade will stand but the prices will not affect the high or low of the stock. 

This appears to mean that whether a trade is declared erroneous and no longer valid depends partly on when the trade occurs, not just on what the price is. It appears most traders who got orders executed just prior to 9:30:01 and traded outside the LULD bands will see their orders cancelled. After 9:30:01, it appears that the trades may stand.

One knowledgeable market observer who read the release and asked to remain anonymous described it as “confusing.”

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