This Day On The Street
Continue to site
This account is pending registration confirmation. Please click on the link within the confirmation email previously sent you to complete registration.
Need a new registration confirmation email? Click here

High Frequency Traders Love a Good Flash Crash

BATS IPO debacle emboldened the high frequency trading exchange - it seems - instead of pulling equity traders from the glitch-prone electronic trading system. Such is the world of stocks since a May 2010 flash crash - precipitated by high frequency exchanges -- which caused some of the largest market swings in U.S. history.

The original May 2010 flash crash caused U.S. stocks to tumble, pushing down the benchmark Dow Jones Industrial Average by about 1,000 points, or about 9%. Stocks recovered shortly afterward.

With this context in mind, investors should expect little out of the SEC and continued equity trading market share gains for high frequency traders, as true investors retreat from stock markets.

The SEC instead will likely emphasize 'circuit breakers,' which can minimize the impact of trading blowups, without addressing the larger problem of system-wide issues with high frequency trading. In June, the SEC approved a rule to provide new safe guards for wild and unexplained swings in the trading of U.S. stocks - however the new procedures will be implemented on a one-year 'pilot' basis starting in February - little consolation for those who may have unnecessarily lost money on Wednesday.

At Wednesday's market open, Knight Capital said that its market making operations were impacted by technical errors, causing problems in the routing of nearly 150 stocks to the New York Stock Exchange. That routing error appears to have caused a wild market open and the halting of trading in Corelogic (CLGX), China Cord Blood (CO), Kronos Worldwide (KRO), Trinity Industries (AAPL) and Molycorp (MCP).

In addition, the stocks of Goodyear Tire & Rubber (GT), Manitowoc (MTW - Get Report) and Pandora Media (P - Get Report) surged over 10% at the open, while Level Three Communications (LVLT) fell 15%, on the irregularity.

The wild swings are thought to result from a flood of computer-generated high-frequency trades, which flooded the market. Trading on some of the biggest companies -- including Radio Shack (RSH), and Dole Foods (DOLE) -- were also affected.

The New York Stock Exchange said it would cancel stock trades that in six companies that reflected moves in excess of 30% between the market open and 10:15 a.m. Those stocks include Wizzard Software Corporation (WZE), China Cord Blood (CO), China Cord Blood, E-House (China) Holdings (EH), American Reprographics (ARC) and Quicksilver Resources (KWK).

"An initial review by Knight indicates that a technology issue occurred in the company's market-making unit related to the routing of shares of approximately 150 stocks to the NYSE," said Knight, in an emailed statement obtained by Bloomberg. "Knight notified its market-making clients this morning to route listed orders away," according to the statement.

All things told, while Knight Capital shares - which were also hit from losses stemming from Facebook's (FB - Get Report) botched IPO - may take time to recover, don't expect any significant regulatory action or market changes from Wednesday's trading problems.

"[You] may get some blue-ribbon panel to put out a report in five months, but nothing will get done," said Joseph Saluzzi, a co-founder and co-head of equity trading at Themis Trading, in an earlier interview with TheStreet.

-- Written by Antoine Gara in New York
2 of 2

Check Out Our Best Services for Investors

Action Alerts PLUS

Portfolio Manager Jim Cramer and Director of Research Jack Mohr reveal their investment tactics while giving advanced notice before every trade.

Product Features:
  • $2.5+ million portfolio
  • Large-cap and dividend focus
  • Intraday trade alerts from Cramer
Quant Ratings

Access the tool that DOMINATES the Russell 2000 and the S&P 500.

Product Features:
  • Buy, hold, or sell recommendations for over 4,300 stocks
  • Unlimited research reports on your favorite stocks
  • A custom stock screener
Stocks Under $10

David Peltier uncovers low dollar stocks with serious upside potential that are flying under Wall Street's radar.

Product Features:
  • Model portfolio
  • Stocks trading below $10
  • Intraday trade alerts
14-Days Free
Only $9.95
14-Days Free
Dividend Stock Advisor

David Peltier identifies the best of breed dividend stocks that will pay a reliable AND significant income stream.

Product Features:
  • Diversified model portfolio of dividend stocks
  • Updates with exact steps to take - BUY, HOLD, SELL
Trifecta Stocks

Every recommendation goes through 3 layers of intense scrutiny—quantitative, fundamental and technical analysis—to maximize profit potential and minimize risk.

Product Features:
  • Model Portfolio
  • Intra Day Trade alerts
  • Access to Quant Ratings
Real Money

More than 30 investing pros with skin in the game give you actionable insight and investment ideas.

Product Features:
  • Access to Jim Cramer's daily blog
  • Intraday commentary and news
  • Real-time trading forums
Only $49.95
14-Days Free
14-Days Free
MCP $0.36 0.00%
FB $102.01 0.00%
KCG $10.51 0.00%
MTW $14.97 0.00%
P $8.00 0.00%


Chart of I:DJI
DOW 15,973.84 +313.66 2.00%
S&P 500 1,864.78 +35.70 1.95%
NASDAQ 4,337.5120 +70.6750 1.66%

Free Reports

Top Rated Stocks Top Rated Funds Top Rated ETFs