"Rogue Algorithm" -- a cinch for idiom of the year lists.

Martin Kaminer martin.kaminer at GMAIL.COM
Wed Aug 1 18:53:20 UTC 2012

3rd paragraph.  We have much to fear . . .

Wave of Volatile Trading Unsettles Markets


United States stock markets were thrown into turmoil on Wednesday
morning after more than 100 stocks were hit with a surge of volatile
and unexpected trading immediately after markets opened.

The New York Stock Exchange said later in the morning that it was
reviewing “irregular trading” that occurred soon after the 9:30 a.m.
opening bell in 148 stocks listed on the exchange. Many of the
nation’s most popular stocks were among those that saw extreme price
swings, including Citigroup, Bank of America and American Airlines.

Traders immediately pointed fingers at one of Wall Street’s most
powerful brokerage firms, Knight Capital Group, speculating that a
“rogue algorithm” kept buying or selling millions of shares of
companies for 30 minutes, sending their shares soaring or plunging.
The Jersey City-based company said in a statement that “a technology
issue occurred” in the division of the company that uses computer
algorithms to buy and sell stocks from other market participants.

As Knight, one of the biggest market makers in the United States
financial markets, rushed to contain the problem, it asked customers
to send trades to other brokers. Knight’s stock dropped nearly 25
percent on Wednesday morning.

The event draws renewed attention to the increasing fragility of the
United States stock markets as they have grown more fragmented and
reliant on high-speed-trading firms like Knight. The volatility
recalled the so-called flash crash of May 6, 2010, when the entire
American market dropped nearly 10 percent in about a quarter of an

On that occasion, stocks recovered from their most extreme losses but
still finished down sharply. That event has been blamed in part for
the increasing flow of money out of American markets and the waning
confidence of investors. The turbulent trading on Wednesday morning
did not have the same impact on the broader market as the flash crash,
and the benchmark Standard & Poor’s 500-index was trading up 0.3
percent at midday on Wednesday.

The trading problems took place on the same morning that the New York
Stock Exchange introduced a new program, the Retail Liquidity Program,
that is set to bring it into competition with Knight for orders from
retail investors. The program created a platform where orders from
ordinary investors to buy and sell shares can be sent to receive a
slightly better price than the publicly listed price. The exchange
faced strident opposition from Knight and other market participants,
which complained that the program would make markets less transparent,
but regulators decided to allow it last month.

There was no immediate information from Knight or the exchange on
whether the Retail Liquidity Program played a role in the morning’s
problems, but Matthew Heinz, an analyst at Stifel Nicholaus wrote a
note to clients in which he said that the program “could have
something to do with today’s confusion as market participants adjust
to the new order types and routing methods.”

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