NYSE halts trading in all securities for 3.5 hours due to a technical glitch

Trading stopped around 11:30 a.m. ET due to what the exchange called an “internal technical issue.” The NYSE said it did not suspect a cyberattack.

“I can’t say with precision exactly what drove it,” NYSE President Thomas Farley told CNBC. “We found what was wrong and we fixed what was wrong and we have no evidence whatsoever to suspect that it was external.”

“There is no indication that there are malicious actors involved,” White House Press Secretary Josh Earnest said, adding that the White House is monitoring the situation.

The issues did not affect the electronic NYSE Arca and NYSE Amex/Arca Options. The Nasdaq reported no technical problems, saying it continued to trade NYSE-listed stocks during the halt.

Read More Art Cashin: Here’s what to do after halt ends

By about 3:15 p.m. ET, the NYSE said “all systems are functioning normally” except the Openbook data feed for the NYSE MKT primary markets. Volume was light after floor trading restarted and closing auctions continued as normal.

The NYSE said all open orders before the halt, including market on close, limit on close and closing offset, were canceled.

“Do we need to change our protocols? Absolutely. This can’t happen again. We can’t put ourselves in this position again. Exactly what those changes are, I’m not yet prepared to say,” Farley said.

Just after 8 a.m. ET on Wednesday morning, the NYSE put out an alert about “a reported issue with a gateway connection” affecting certain symbols. It issued a notice at 10:37 a.m. ET that the problem was resolved.

“We opened the market as usual. All the NYSE-listed stocks opened without incident. Around mid-morning, we started to see some concerns about the way trading was occurring. Customers weren’t getting all of the messages back that you otherwise expect,” Farley said.

NYSE floor trading volume was 444 million on Wednesday, about half of the 30-day average of 861 million. Still, trading on the NYSE floor makes up only about a quarter of consolidated tape volume, or trading of all NYSE securities on all platforms, based on a recent 30-day average.

“This will not cause a move in any particular direction, so I would kind of wait it out and see what happens,” said Art Cashin, UBS director of floor operations at the NYSE, in a CNBC interview.

Read More Cramer on NYSE halt—We were warned this was coming

Retail investors were largely unaffected by the outage, said JJ Kinahan, chief strategist at TD Ameritrade.

“This is going to make it more difficult to say the floor traders are important when there’s a technical problem. Because the technical problems take out the floor traders, too,” said Richard Repetto, an analyst with Sandler O’Neill & Partners.

Officials widely denied any link to a cyberattack.

The FBI said in a statement it would “monitor the situation” but “no further law enforcement action is needed at this time.” Securities and Exchange Commission Chair Mary Jo White in a statement said “we are in contact with the NYSE and are closely monitoring the situation.”

Homeland Security Secretary Jeh Johnson noted the glitch that caused the trading halt and an earlier computer problem that grounded United Airlines flights appeared unrelated.

OCC and The U.S. Options Exchanges Announce New Risk Control Standards to Strengthen Industry Protections

CHICAGO (September 29, 2014) – OCC and the U.S. options exchanges announced today the adoption of risk control standards that include price reasonability checks, drill-through protections, activity-based protections and kill-switch protections, pending regulatory approval.

Earlier this year, OCC and the options exchanges agreed on a principles-based set of exchange risk control standards designed to reduce the risk of errors or unintended activity that could cause or contribute to a financial loss to market participants and OCC. OCC has adopted the risk control standards and approved an implementation plan. The standards will be implemented through an OCC rule that will apply a principles-based approach to options transactions.

Read the full press release on the OCC’s website.

MFA Recommends Kill Switches

MFA has supported certain standardized market measures and believes they have been extremely effective in limiting market disruptions and reducing investor confusion in times of extreme market volatility. Such measures include the use of market-wide circuit breakers, price collars (i.e., the Limit Up-Limit Down mechanism), and uniform exchange rules on clearly erroneous executions. In addition, MFA has supported the Market Access rule4 and believes it has been effective in reducing risks faced by broker-dealers, their customers including institutional and retail investors, and the markets more generally. However, we believe additional steps can be taken to bolster risk management practices.

Pre-Trade Controls

The Commission or the Financial Industry and Regulatory Authority (“FINRA”) should provide more specific guidance on pre-trade risk controls to increase transparency to investors, encourage greater uniformity of controls among broker-dealers, and reduce concerns with respect to discrepancies in latency.

Standardized Kill Switches

The Commission should direct the Exchanges to work together to develop a standardized mandatory kill switch protocol, methodology, and rules. Standardizing a kill switch protocol will simplify implementation and use by exchange

See full Recommendation from the Managed Funds Association Equity Market Structure Policy Recommendations September 30, 2014

Goldman Sachs to pay $7M over options mistake

Goldman Sachs (GS) will pay $7 million to settle regulatory charges the investment banking giant sent thousands of erroneous trading orders that disrupted options markets in 2013.

The New York-based bank failed to have adequate safeguards to prevent its computers from sending 16,000 mis-priced options orders to financial exchanges in less than an hour on Aug. 20, 2013, the Securities and Exchange Commission said Tuesday.

A software configuration error inadvertently converted Goldman Sachs’ contingent orders for various options series into live orders and assigned each a price of $1, the SEC said in a settlement order.

The problem was “exacerbated by human error,” the order said, referring to findings that showed Goldman Sachs personnel mistakenly overrode circuit breakers that would have prevented the mispriced orders from reaching options markets.

As a result, approximately 1.5 million options contracts were sent to options exchanges during pre-market trading. The contracts, placed on stocks with ticker symbols from I to K, were executed within minutes after the start of regular market trading that day, the SEC said.

The trades sent some prices down. Many of those transactions were later cancelled or had price adjustments pursuant to option exchanges’ rules regarding erroneous trades, the SEC said.

Goldman ultimately suffered $38 million in losses, based on the trade cancellations and price adjustments, the SEC said.

“Firms that have market access need to have proper controls in place to prevent technological errors from impacting trading,” said Andrew Ceresney, head of the SEC’s enforcement division. “Goldman’s control environment was deficient in several ways, significantly disrupted the markets and failed to meet the standard required of broker-dealers under the market access rule.”

Goldman Sachs neither admitted nor denied the SEC allegations. But spokesman Michael DuVally said the bank was pleased with the resolution.

“Since the incident, we have reviewed and further strengthened our controls and procedures,” he said.

However, some market participants argued the SEC penalty should have been higher. Nanex CEO Eric Hunsader, whose company supplies market data to the financial industry, spotted the Goldman Sachs trading glitch as it occurred.

He argued that the SEC should have required a more costly settlement from the bank because the problem may have cost some of Goldman Sachs’ trading partners more than $7 million.

Goldman Sachs shares closed 0.55% higher at $208.79.

Key US equity players urge SEC adopt abnormal trading controls (Reuters)

Key players in the U.S. equity marketplace, including exchanges, brokerages and trading firms, called on U.S. regulators to set limits and track trading activity after a glitch caused Knight Capital Group to incur a $440 million loss this summer.

A core nucleus of entities involved in the transaction of U.S. securities, including a clearing house and a watchdog agency for brokerages, urged on Friday that the Securities and Exchange Commission develop controls to better detect abnormal trading behavior in real-time.

The so-called Industry Working Group of 16 brokerages and trading firms, along with five U.S. stock exchange operators and the Financial Industry Regulatory Authority, also urged the SEC to evaluate whether a longer-term consolidated control mechanism could be built at the Depository Trust & Clearing Corp.

See full article on Reuters

Chicago Fed calls for better risk controls on high-speed trading (Reuters)

* Says more controls would have helped contain losses from Knight glitch

* Finds firms fail to implement many risk controls in name of speed

* Calls for automated risk controls at every step in trade’s life cycle

Sept 17 The increasing number of technological snafus at exchanges and trading firms highlights the need for more stringent risk controls at all levels of the high-speed trading cycle, the Federal Reserve Bank of Chicago said on Monday.

See full article on Reuters

Knight Capital Says Trading Glitch Cost It $440 Million

$10 million a minute.

That’s about how much the trading problem that set off turmoil on the stock market on Wednesday morning is already costing the trading firm.

The Knight Capital Group announced on Thursday that it lost $440 million when it sold all the stocks it accidentally bought Wednesday morning because a computer glitch.

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The losses are threatening the stability of the firm, which is based in Jersey City. In its statement, Knight Capital said its capital base, the money it uses to conduct its business, had been “severely impacted” by the event and that it was “actively pursuing its strategic and financing alternatives.”

The losses are greater than the company’s revenue in the second quarter of this year, when it brought in $289 million.

“With the events of yesterday, you have to question if this is the beginning of the end for Knight,” said Christopher Nagy, founder of the consulting firm KOR Trading.

Timeline: Trading Errors

Knight Capital Group

Shares of Knight Capital closed down 63 percent, at $2.58, on Thursday. On Wednesday, the shares fell 32 percent.

The problem on Wednesday led the firm’s computers to rapidly buy and sell millions of shares in over a hundred stocks for about 45 minutes after the markets opened. Those trades pushed the value of many stocks up, and the company’s losses appear to have occurred when it had to sell the overvalued shares back into the market at a lower price.

The company said the problems happened because of new trading software that had been installed. The event was the latest to draw attention to the potentially destabilizing effect of the computerized trading that has increasingly dominated the nation’s stock markets.

Until this week, Knight had been one of the biggest beneficiaries of the evolution of the market, helping clients trade in and out of stocks at high speeds. The firm was responsible for 11 percent of all trading in American stocks between January and May, according to Adam Sussman at the data company Tabb Group.

On Thursday, Knight said that none of its customers had been hurt by the errant trades.

Still, the trading glitch is especially uncomfortable for Knight’s chief executive, Thomas Joyce. Mr. Joyce, 57, has been at the helm of the company since 2002. Now that his firm is in the spotlight, it’s embarrassing for Mr. Joyce because he was a vocal critic of the hiccups that upended the Facebook public offering in the middle of May. At the time, Knight suffered $35.4 million in losses because the trades the company was making in Facebook shares weren’t registered by Nasdaq for hours.

Knight was founded in 1995 and went public in 1998 after quickly becoming one of the largest middle men, or market makers in the stock market. Knight founded DirectEdge, a company that is now the fourth-largest stock exchange operator in the United States. Knight sold stakes in DirectEdge to other Wall Street firms and now owns only a minority stake in the company.

Knight has become known for executing trades on behalf of retail brokers like TD Ameritrade and ETrade. It is the major player in the business along with UBS, Citibank and the Chicago firm Citadel.

Mr. Nagy of KOR Trading, who used to work for TD Ameritrade, said that large retail brokers were likely to find alternatives if Knight were unable to continue taking in new business. But he added that Knight had “unmatched” connections with smaller banks and brokers, and those smaller firms may have trouble immediately finding a replacement for Knight.

Knight had recently been increasing its business and reported having 1,418 employees as of the end of the first quarter of this year in 21 locations around the world.

Correction: August 2, 2012
An earlier home page headline about the Knight Capital Group developments referred incorrectly to the company as a hedge fund. It is, as the article correctly notes, a trading firm.

High frequency trading firm fined $850,000 for computer errors

A high frequency trading firm has been fined $850,000 for three separate computer errors which disrupted trading on the futures market.

Infinium Capital Management’s trading programs are believed to have malfunctioned on 7 October 2009 and later that month on 28 October – both errors led to uncontrolled selling of futures on the Chicago Mercantile Exchange (CME).

In February the following year an algorithm malfunctioned again which led to the selling of crude oil futures – the incidents led to the CME charging Infinium with committing “acts detrimental” to the market place and for improper identification of the trades.

Greg Eickbush, Infinium’s chief operating officer, told Reuters that the fine could be the largest penalty handed out for a non-fraud error.

“I think that just represents the times and the current environment more than anything else. We didn’t want to be on the precedent-setting end of any fines, however we do understand the importance of keeping the marketplace as transparent and as trustworthy as possible,” he told the news provider.

Infinium neither admitted nor denied the rule breaking.

Punishment waits two years for computerized trader

Around 11 a.m. on Jan. 13, 2010, a computerized trading system at Chicago-based Blue Fire Capital LLC went haywire.

The high-speed trading firm mistakenly made more than 2,300 trades in two seconds on CME Group Inc.’s electronic exchange, buying and selling almost 200,000 futures contracts with itself in a “wash trade.” Such trades are prohibited because they can inflate artificially the contract’s market price, which is exactly what happened in the Blue Fire situation.

At roughly the same time, Blue Fire’s system also attempted to trade another 7.8 million contracts, but the orders exceeded a 2,000-contract limit on the CME’s electronic system and were rejected. That led Blue Fire’s automated trading system to shut down. The trades all came in the CME’s most popular electronic futures contract—the so-called S&P E-mini, which is linked to the movement of the Standard & Poor’s 500 Stock Index.

Last October—more than two-and-a-half years after the faulty trades took place—CME fined the firm $150,000. Despite the time lapse, the regulator says it polices its electronic trading arena vigilantly for such violations.

“Significant investments in our regulatory tools and technology, including staff dedicated solely to the support and continuous development of our regulatory technology infrastructure, ensure that our regulatory and market protection capabilities anticipate and evolve with the changing dynamics of the marketplace,” the company says in a statement.

According to the case file, CME concluded that while Blue Fire had tested its automated trading system before implementation, “it lacked sufficient pre-trade controls.” CME itself does not test traders’ computerized systems before they are brought online.

Andrew Karos, Blue Fire CEO and director of trading, declines to comment through a firm employee.

High-speed electronic traders account for about half the trading on futures exchanges, according to some estimates. But CME has prosecuted only a handful of similar computer malfunctions in recent years, at Infinium Capital Management LLC, Whiteside Energy L.P. and Aventis Asset Management LLC. And CME didn’t always detect the violations itself. In some cases, the trading firms themselves brought the errant trades to the attention of the exchange in the hopes of reversing the transactions.

Blue Fire was formed in 2007 to trade for its owners, rather than public customers, in a variety of assets including futures, equities and currencies. Like other “prop shops,” as proprietary trading firms are known, it invested heavily in technology to achieve ultra-rapid trading capabilities and gain a technological edge over rival traders by capturing even slim pricing discrepancies that can add up to significant profit over a high volume of trades.

But it hasn’t paid off as expected, according to sources familiar with the strategy. Around 2010, the firm had about 50 employees and visions of expanding into a larger office. But in the past couple of years it has cut its staff; former CEO Jim Kanellitsas left the firm last year.