Traders on the New York Stock Exchange were the victims of a major outage during US trading hours on Tuesday which led to the cancellation on literally thousands of trades. Over 60% of the securities listed on the NYSE began the session without the usual auction used to determine the opening price. NYSE said yesterday that it had been forced to cancel 4,300 trades across 251 stocks.
This led to some spectacular intra-day price action in some stocks, including the likes of AT&T and Wells Fargo. Over 80 stocks hit limits. Some others, like Morgan Stanley, had short selling restrictions applied which had nothing to do with actual short selling. NYSE floor traders complained that they had not seen anything like this in over three decades.
The exchange has blamed what it calls its Disaster Recovery Configuration. The SEC has confirmed that it will be investigating the issue. It has brought in a new regime which is meant to stop problems like this, waving the threat of fines under the noses of US exchanges.
Fun fact: the NYSE agreed to pay $14m in penalties to settle regulatory charges in 2018, following outages that occurred in 2015.
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Events like this are extremely rare, and normal trading operations seem to have been restored in the NYSE. But it looks entirely likely that the NYSE will be facing another fine this time around. The full number of trades that were affected by the problem is expected to be much higher than initially declared. Beyond any regulatory fines, there is also the prospect of possible law suits.
NYSE has said that firms affected can seek compensation and has a compensation fund in place for such eventualities.
Questions raised about auction system
One of the big issues the failure has brought up is the plan to make more use of auction systems on exchanges. This is currently favoured by the SEC itself. Opponents of the policy are now likely to use the infrastructure failure as an argument against the move.
NYSE has been dogged with technological problems in the past. The SEC worries that the issues will undermine the confidence of retail investors in the exchange, which is considered essential. There was an improper halt on the NYSE’s Arca exchange in 2015 which has had repercussions for a number of years.
Currently the opening auctions on the NYSE use a combination of algorithmic quotes and a physical auction between human market makers. There is less and less tolerance for errors on large exchanges, which experience the highest volume of trades. A problem with the Tokyo Stock Exchange during the start of the Covid 19 pandemic led to the resignation of its CEO Koichiro Miyahara in 2020.
