NEW YORK — As computer errors at one of the largest U.S. market makers sent stocks swinging as much as 151 percent Wednesday, Joseph Cangemi, a broker at ConvergEx Group, acted like a driver approaching a car crash. He slowed down.
“You have to put on your extra-sensitivity helmets and look for every possible bit of information to make prudent decisions,” said Cangemi, the head of equity sales and trading at the New York-based firm. “We were in a heightened state of alarm, and we’re actually still in a heightened state of alarm.”
The New York Stock Exchange reviewed trading in 140 stocks as the market’s open was rocked. Trades that occurred during the height of the volatility were canceled in six securities.
Knight Capital Group said the problem was triggered when it installed new trading software, which resulted in the company sending numerous erroneous orders in 140 stocks listed in the New York Stock Exchange. Traders said that a rogue algorithm repeatedly bought and sold millions of shares of companies such as RadioShack, Best Buy, Bank of America and American Airlines, sending trading volume surging.
The technical problem that briefly threw dozens of stocks into chaos Wednesday will cost Knight Capital Group $440 million, the trading firm said Thursday. Knight’s own stock plunged for a second day, erasing 75 percent of its value in two days. The company also said it is pursuing ways to raise money to fund the expense, raising questions about the firm’s viability. And several financial institutions announced they had stopped trading with Knight, at least temporarily.
Knight’s embattled CEO Thomas Joyce appeared publicly for the first time Thursday to defend his firm in the aftermath of the trading disaster. “You cannot keep people from doing stupid things,” Joyce said in an interview on Bloomberg Television. “That is what happens when you have a culture of risk.”
HOW DID THIS HAPPEN?
While almost all stock transactions in the United States used to be handled by three exchanges, regulations to increase competition and reduce costs have fragmented markets across about 50 different venues, raising concerns about integrity when the computers that increasingly dominate trading malfunction. For some investors, Wednesday’s disruptions were a reminder that the issues raised in May 2010 when the flash crash briefly wiped out $862 billion from U.S. equities have yet to be solved.
“Everyone’s scratching their heads and going, ‘OK, well, who spilled coffee on the computer again?’” Peter Sorrentino, who helps oversee $14.7 billion as a senior money manager at Huntington Asset Advisors in Cincinnati, said in a phone interview, “After the flash crash, any time you see something like this, you definitely pause.”
Wednesday’s swings were caused by a malfunction in a trading algorithm, said a person at Knight who asked to remain anonymous. The Securities and Exchange Commission and Commodity Futures Trading Commission blamed a broker’s algorithm for setting into motion the events that caused the market crash in May 2010.
Instant messaging systems used by traders were full of messages saying “What the heck, what’s going on, there’s no news, I’m not aware of any news, dig into this, has anybody heard anything?” said Brian Barish, who oversees $7 billion as president and chief investment officer at Denver-based Cambiar Investors.
As the stock swings mounted with Dole Food rising as much as 15 percent and Harley-Davidson falling as much as 12 percent, Knight advised clients to route orders elsewhere. The issue was confined to its market-making unit and its other operations were unaffected, the company said.
Knight is one of many companies whose fortunes have risen as regulators made a series of changes over the last 15 years that have opened up the markets to new exchanges and trading firms that use computer programs, or algorithms, to execute thousands of trades a second. High-speed firms use the algorithms to make money from small changes in stock prices and now account for more than half of all stock trading.
“It’s like technology out of control,” Kenneth Polcari, managing director at ICAP Plc’s equities unit and a floor trader at the New York Stock Exchange, said in a telephone interview. “How many times have we seen this? We saw it happen on Nasdaq with Facebook. We’ve seen it happen in other technology platforms. What’s frustrating about this is that the business has become so automated and electronic that in certain times, you don’t feel like you have control.”The Associated Press and The New York Times contributed to this report.