Art Cashin on NYSE, Cancelled Orders

Art Cashin is head of floor operations at UBS. He has been reporting from the trenches for decades, and puts out daily color on the markets. On CNBC, he provides the buzz from the NYSE floor.

This excerpt is from his commentary today:


At this point, we should talk about structure.

The NYSE market model has some built-in safety checks. They are somewhat like the speed bumps you might find around a school zone. They are not intended to stop the car, just to slow it down enough to prevent a serious accident. Trading is slowed very slightly by those protective speed bumps allowing better reaction time and attempting to inhibit a rush over the cliff.

Some of the players, however, tried to get around the NYSE speed bumps. To do that they sent their sell orders to other, thinner markets.

One of the examples cited in the press was Proctor & Gamble (PG). The stock was trading on the NYSE at 56. The boys who circumvented the safety speed bumps were selling PG at 39 in other thinner markets. Some sold into bigger air-pockets with 40 dollar stocks trading at a penny or less.

When the sellers saw they had rushed to sell at inferior prices (How could I sell PG 17 points below the NYSE last sale??), two things happened. First, you stop selling – immediately. Second, you try to buy back some of that stock you just sold at “give away” prices.

That kind of action is what caused the Dow to drop 600 points in a matter of minutes and completely reverse in a similarly brief period. A 17 point price gap between ticks in PG would result in a 136 point move in the Dow. That’s just from one stock.

Another assumed factor in the zany trading was thought to be a possible trader error. One, two, or even three different firms were rumored to have hit a bad button and sold more shares than intended. The media suggests it was a typo error – instead of entering “M” for million, they typed “B” for billion.

That’s highly unlikely. A more plausible explanation is that many trading desks have computers pre-programmed to limit key strokes. Instead of hitting three key strokes to sell 100, you teach the computer to “assume” the “00”. That allows you to hit a single key “1” which is then translated into 100 shares. Not much of an error if you’re selling 100, but if you try to sell 1 million, those two invisible zeroes changes your order into 100 million. That’s a market mover, especially if you’re selling a basket rather than one stock.

The rumors of “trader error” could not be confirmed but they were, and are, pervasive.

One other oddity occurred after the close of business. Several venues decided to cancel a variety of those “outlier trades”. Under their rules, they can announce a trade void and participants often have no right to appeal.

So, if you bought XZY at “bargain” prices at 2:43 and then sold it much higher at 3:30, then at 4:30 your buy order had been canceled. Your sale is still good, however, so you are now, accidentally, net short, at what looked like a good price but now looks like a bad one.

That could bring some buy interest this morning as folks seek to cover these accidental shorts. It all depends on how pervasive the cancellations were.

Another factor could be the rumored trader error. If it occurred, did they cover by the close? Did they hedge overnight? We may know on the opening.

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