Ray,

You've championed the NYSE market model in the past by pointing out trade breaks in other markets that don't have a human component.
Well, I've just found out that the NYSE has decided to break many trades in two stocks (JWN and AEO) from this morning.

Why did the NYSE market model let us down here? Is there an issue with the new DMM model that the specialist model would have prevented? Why were these trades erroneous, when LRPs were hit and the system kicked into slow mode?

Also, why are only trades on the NYSE broken in these cases and not, at least, on NYSE Arca as well?

Thanks,
Josh

by Josh on December 19, 2008 3:04 PM

Josh -- I just checked into it and here’s what I learned: a system problem at a customer of a member firm cause the member firm to send us small orders at aberrant prices. The orders executed electronically and did trigger Liquidity Replenishment Points, which helped us quickly confine the problem to two minutes duration in one stock, three minutes in the other.

The firm requested that we break trades in four issues; we determined to do so in two of those issues, based on our policy of breaking trades 10 percent or more away from the previous sale (trades in the other two issues did not meet that threshold).

Our notices about this are on our System Status page: http://www.nyse.com/equities/nyseequities/Today_Alerts_New.shtml

I think you can see that this is different from what happened in the electronic markets in September and October, when liquidity dried up in those markets and because of how they are designed, legitimate orders executed at aberrant “stub” prices and this continued for long periods of time. Here today, the error trades were the result of erroneous orders, and were arrested quickly. Different, yes, but we did have errors take place, and I’m not minimizing that.

Other markets decided not to break trades in today’s situation, because they were not notified by the firm. That’s why the various markets are meeting to harmonize their policies and practices concerning errors.

Thanks for asking, Josh.

by Ray Pellecchia on December 19, 2008 5:28 PM

Ray,

I think this trade break shows just how far the NYSE has fallen.

Breaking trades that are not obvious errors, trades in volatile stocks with S&P downgrades eminent, on options expiration, with large volume traded, sullies the reputation of the NYSE.

In my book the NYSE is now on level with the reputation of the former AMEX, and below the NASDAQ.

My purchases in JWN and AEO orginially resulted in a large gain for me of approximately $9,000. Instead, because of a NYSE firm's errors, I am saddled with a loss of over $10,000 and net short now.

The NYSE is no longer reliable and is more than likely corrupt from the top.

by Jeff Irish on December 21, 2008 6:16 PM

Ray,

I really appreciate all that you do.

This appears to me to be a serious credibility issue for the exchange. Not only that the trades were canceled but that the process took so long to work through (looking at the time like in that link you posted one would not be informed until 2:45 about a situation that occurred near the open). I feel for any traders that were hurt by stops going off or for buying the stocks down there and being informed much later that the trades were canceled - I hope they didn't leave early for a long weekend. The situation and explanation seems fishy especially considering that the NYSE Arca trades held. I hope as a bare minimum the NYSE can release a more thorough explanation about what exactly happened and better guidelines about when and why they brake trades.

- For now I have lost a lot of confidence in the NYSE

by Jeff Smith on December 21, 2008 8:09 PM

"Jeffs" -- The errors were documented by the firm that requested the breaks; we would do the same for any firm in similar circumstances.

The decision took longer than it should have because of the protracted discussions with other exchanges. Like I said, we are engaged in discussions with other markets to harmonize our practices so that these situations can be addressed faster and more uniformly in the future.

While I acknowledge Friday's situation, for perspective I think you also need to take into account that NYSE has by far the fewest trade breaks of any market that trades NYSE-listed issues. Thanks.

by Ray Pellecchia on December 22, 2008 7:22 AM

Ray,

I really appreciate your efforts, patience, and information on this issue.

I understand that errors happen -- if it's not a traditional "fat finger" error, these days it can be a slew of erroneous orders placed by a malfunctioning piece of software, which it sounds like the case was here.

But seriously, Ray, don't you have to draw the line somewhere and say, "hey, your system was malfunctioning for 4 straight minutes and you did nothing to stop it. We can't break all of these trades." Ray, in today's trading world where time resolution is in milli-(and steadily becoming micro-)seconds, four minutes is an eternity.

This firm with the malfunctioning system was either extremely negligent in their risk management or these trades were not entirely erroneous. Either way, this situation and the actions taken by the exchange have had extremely negative impacts on your customers. I think we deserve better, honestly. We want to at least know that you're taking disciplinary action against this member firm.

Finally, I'm still curious why NYSE Arca trades that took place in the same time ranges and same price ranges as the erroneous NYSE trades were allowed to stand. These trades were a direct result of the erroneous NYSE trade and would not have happened in their absence. You said that, "Other markets decided not to break trades in today’s situation, because they were not notified by the firm." That's fine for Nasdaq and other ECNs, but Arca is part of your organization.

Thanks for your help, Ray.

Jeff

by Jeff Hebrew on December 22, 2008 10:49 AM

Jeff -- One parent company, yes, but for purposes such as this, the two must operate independently, as two separate self-regulatory organizations. Again, noted -- something the markets should collectively address.

by Ray Pellecchia on December 22, 2008 4:16 PM

Ray.... I found all this dialogue representative of what I've been commenting on about the need for the NYSE to drop the floor. I find it especially interesting as I recently received an email from your CEO whining about the Newscorp loss and claiming that the NYSE does not break trades. Seems like your customers are voicing their opinions by either switching or sending order flow to NASDAQ. Is anyone listening?

by John Villa on December 26, 2008 8:26 AM

John -- We take all input into consideration, including that of Josh and Jeff above. Customer input across many channels has guided the changes we've made at the NYSE this year, and our rebounding market share is an encouraging sign that we're on the right track, though the war is far from over.

Blog comments are part of our ongoing dialogue, but I would also caution against reading too much into the blog conversation: only handful of customers/the public write into our blog.

On your other points:
-- The number of trade breaks on NYSE in fact is extremely small compared with that of our competitors; having a trading floor that cuts off problems quickly is part of that differentiation.
-- In the last three months, NYSE is gaining share in trading NYSE-listed stocks and Nasdaq is losing it, not the other way around. We're working on keeping that trend going.

Lastly, I wanted to offer that if you're with one of our customers and want to discuss these issues in greater depth, I'd be happy to arrange a conversation with someone who's a lot more knowledgeable than your humble blogger.

Thanks for writing, John.

by Ray Pellecchia on December 26, 2008 9:18 AM

Ray, just the fact that the NYSE actually listens to its customers is a very good deal. I really believe that the NYSE will eventually get it right and your current increase in MKT share is a good sign of things to come. I think NASDAQ could care less about what it's actual customers have to say. I believe 2009 will be a much better year for the exchange when some of the positive changes start to add up. Thanks.

by tony dey on December 26, 2008 10:22 PM

Thanks, Tony. I agree that we're starting to see some encouraging signs. The task now is to continue building on that progress. Best wishes to you and everyone else for a successful 2009.

by Ray Pellecchia on December 27, 2008 9:37 AM