• Sep
  • 09
  • 2008
  • 1:28 PM

Yesterday's erroneous plunge in UAL could have been prevented

By: Ray Pellecchia
File Under: NYSE

Pity that for all of the discussion of yesterday's debacle in UAL stock, nobody appears to question where the stock is traded and how the choice of market could help prevent such a problem.

"The mysterious appearance on the Internet of a nearly six-year-old news story about UAL Corp.'s 2002 bankruptcy-court-filing caused investors to dump the stock Monday," the Wall Street Journal reports today on the front page of its Marketplace section.

"After trading near $12.50 early Monday, stock in United Airlines' parent quickly fell to $3 on the Nasdaq Stock Exchange on heavy volume before trading was halted and the company issued a statement saying that reports of a new Chapter 11 filing were 'completely untrue,'" the Journal adds before diving into a blow-by-blow account of how the old news report was mistakenly reborn.

The New York Times says in an article on today's business front, "By the end of the day, fingers were pointing in many directions to assign blame."

Every direction except the market, that is.

Had UAL been listed on NYSE, a specialist assigned to the issue would have spotted the move and worked with Exchange staff to immediately halt the stock until the situation could be sorted out. The rapid price change also would have triggered Liquidity Replenishment Points (LRPs), which also would have called attention to it. In my view, no way would the price be allowed to go from $12+ to $3 for no good reason if the stock were listed on NYSE.

Don't people wonder why every time you hear about one of these erroneous headlines or hoax stories killing a stock, the company is not listed on NYSE? I'm remembering all the way back to the Corinthian Colleges problem.

On NYSE, people have assigned responsibilities to make fair and orderly markets in specific issues, and take action before such mistaken news gets to be much of a problem. On that other market, not so much.

Hat tip to Paul Kedrosky's Infectious Greed blog, and the Times' Dealbook, where I first spotted this yesterday.

Comments

Sort of like the help the specialist provided for Bear Stearns.

by Alan on September 10, 2008 11:15 AM

Alan -- The specialist was responsible for what happened to Bear Stearns? Oh please.

by Ray Pellecchia on September 10, 2008 11:46 AM

Yeah Ray, just like the UAL news release was from five years ago, your comment about how it could have been prevented by specialists applies to the NYSE five years ago. The specialists wouldnt have stepped in and done anything because it would have happened just as fast and because they have little incentive. They have become useless now, and the NYSE has become irrelevant as a result. Give us all a break.

by jack on September 10, 2008 12:47 PM

Jack -- I respectfully disagree. As I mentioned, a specialist would have spotted the price swing and worked with the exchange's staff to halt the stock until the situation was sorted out. There are also LRPs that would have been triggered, and that would have called attention to it.

I do agree with your point that specialists currently don't have enough incentive and ability to participate. I'm expecting news soon on the SEC's review of our proposal to dramatically change that.

Thanks for writing, Jack.

by Ray Pellecchia on September 10, 2008 4:55 PM

To be more specific, I was talking about the Friday where Bear lost 50% of their market cap on rumors and not publicly available information.

by Alan on September 11, 2008 1:35 PM

Alan -- Thanks for explaining. Not commenting specifically about the Bear Stearns situation, but in general, when rumors are moving a stock, the specialist or NYSE operations or regulatory staff will spot the activity, and our staff will contact the company to see if it is going to issue any news or a statement that may clarify their situation. If they do so, we will halt the stock in advance, until the market can receive the news, and then re-start. If they have nothing to announce, the stock will continue to trade and we'll continue closely monitoring the situation.

by Ray Pellecchia on September 11, 2008 5:40 PM

Good job on that CEG today. Good thing the specialist stepped in before things got crazy. LOLOLOL

by jack on September 16, 2008 1:56 PM

Your pride in NYSE colors your opinion I think. When stocks sell off excessively the NYSE specialist will stay in slow mode longer and longer and no longer provide liquidity. And as for an earlier halt look at CEG today. Opened at $47 and went down to $13 and it's still not halted.

by moopy on September 16, 2008 2:05 PM

Jack, Moopy -- Will check into it and let you know what I find. Thanks.

by Ray Pellecchia on September 16, 2008 4:37 PM

Jack, Moopy -- The NYSE did halt the stock, at 1:55 p.m. for an order imbalance (more than 100,000 shares to sell). The last trade here was at $23.78 when we halted it. Other markets continued to trade, and the price plunged as Moopy indicates. We reopened it on NYSE at 2:02 p.m., at a price of $20.15. Prior to the halt we did have a period of unusual slowness, but that was due to a system issue, not the specialist.

by Ray Pellecchia on September 17, 2008 11:45 AM

OH GREAT! LOL! So the specialist woke up down 24 points to initiate a halt that wasnt honored by other venues. Give me a break will ya.

by jack on September 17, 2008 10:21 PM

Jack -- Ahh, now I understand. The specialist is supposed to not let the stock price go down, and he/she is also responsible for what happens on other markets.

by Ray Pellecchia on September 18, 2008 8:41 AM

Thanks for the info, Ray. But I don't recall CEG indicating a halt; I thought the NYSE quote was a U for most of the bounce. I also thought that a true halt has the primary market center notifying the ECNs to stop trading. A halt without that is just like what happens when AMEX has technical difficulties, displays a non-firm quote, and stops printing. That's not really a halt.

by moopy on September 18, 2008 7:23 PM

Moopy -- We definitely halted the stock on NYSE for the period I indicated, but there are two kinds of trading halts. A "regulatory" halt is for news pending, and all markets have to observe it. An "imbalance" halt is for an order imbalance in our own market, and other markets can and do trade during imbalance halts. The halt in CEG obviously was of the latter variety.

I'm sorry that such situations can produce difficult trading conditions, as you and Jack have pointed out. We try to keep such situations to a minimum.

Thanks for writing.

by Ray Pellecchia on September 18, 2008 8:06 PM

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