Incompatibilities of Trading Platforms, Computer Algorithms Possible Keys To Market Panic

Ever since computerized trading became dominant in the nation’s stock markets in recent years,

market experts have been warning that the lack of consistent rules among exchanges and the increasing complexity and speed of computer trading systems could destabilize markets.

Ever since computerized trading became dominant in the nation’s stock markets in recent years,

market experts have been warning that the lack of consistent rules among exchanges and the increasing complexity and speed of computer trading systems could destabilize markets.

Ever since computerized trading became dominant in the nation’s stock markets in recent years,

market experts have been warning that the lack of consistent rules among exchanges and the increasing complexity and speed of computer trading systems could destabilize markets.

This appears to have happened last Thursday, when stock prices plunged and the Dow Jones industrial average fell roughly 600 points in a few minutes …

Investigators say the rules on halting trading were created for a time when the New York Stock Exchange accounted for the vast proportion of stock trading.

But over the last half decade the Big Board’s share of the market has dropped sharply — in part because of regulatory changes to encourage new competitors —

while ever larger volumes of stocks are traded on electronic exchanges without circuit breaker rules.[br]

Investigators are now focusing on the events of last Thursday, when several hundred stocks on the Big Board,

including five major stocks that make up the Dow — Accenture, Procter & Gamble, 3M and two others — went into slow mode,

according to this article in the New York Times.

This decision forced a switch to slow-motion trading as traders on the floor tried to arrest the decline by manually seeking out bidders.

But that did not work, because trading shifted immediately to broader markets controlled by computers, where the plunge continued …

Investigations are looking at what effect the decision to halt trading in these stocks in New York had on broader market confidence — and on algorithms used by computerized traders.

The scale of the shutdown on may have been a new phenomenon for these computer systems.

They may also have been programmed to shut down in such a cataclysmic moment of stress,

which would have had a further cascading effect in withdrawing bidders from the market and putting further intense downward pressure on prices …[br]

Not one of the regulatory agencies has said anything more about the possible cause of Thursday’s market break

since a statement on Friday afternoon identified disparate trading conventions and rules as a possible cause and said the review was continuing.

The lack of coordination among exchanges has been one part of the investigation and is considered by regulators to be more of a magnifying event than the trigger of the market’s sudden swoon, according to another person close to the investigation.

As trading has been dispersed among a dozen electronic exchanges, the S.E.C. and other market regulators have maintained no centralized database of stock trades, order sizes or prices.

That has made it more difficult for regulators to piece together what exactly happened on Thursday.

The S.E.C. has been warned in recent months by market participants, publicly traded companies and other regulatory agencies

that the lack of coordination between trading platforms, as well as the expansion of high-speed trading in alternative markets,

has furthered systemic risk, encouraged regulatory arbitrage and increased opportunities for market manipulation.

The staff of the Financial Industry Regulatory Authority wrote to the S.E.C. in April that “no single regulator has a full picture of all trading activities in the U.S. equity markets.”