Updated from 4:25 p.m. EDT
An order that originated from
was transmitted incorrectly, causing shares of
to be halted this morning on the
New York Stock Exchange
as specialists identified what they considered erroneous trades.
The stocks were halted on the NYSE for most of the morning and were reopened starting with Jefferies at around 11:15 a.m. EDT; all three were reopened shortly after 12 p.m. EDT. But in an episode likely to revive debate about the benefits of human involvement in trades, the
was forced to cancel, or break, so-called off-market trades made via electronic platforms in the morning hours prior to the NYSE halt.
Sources say Fidelity Investments was acting as the sponsoring broker for a third party, National Financial Services, which is a unit of the mutual fund giant.
"Fidelity Capital Market Services, which is part of Fidelity Brokerage and executes trades for a variety of clients, electronically transmitted several small orders accurately to the Lava trading system," says a Fidelity spokesman. "Once Fidelity Capital Market Services recognized problems with handling
the orders, they immediately stopped transmitting."
The Fidelity spokesman declined to comment further.
Check out TheStreet.com TV video.Aaron Task and Farnoosh Torabi discuss the cause of the morning's trading halts.
"A technology malfunction that sent erroneous orders to the market has been identified, and appropriate remedial action has been taken," says Stephen Cohen, a spokesman for Lava, which is an electronic trading platform and unit of
. Cohen declined to comment further.
My understanding is that there was a 100-stock buy program at the open this morning that kept replicating itself, resulting in the following orders that raised the eyebrows of NYSE specialists:
- 50,000 orders of WYE for 800 shares each, a total of 40 million shares;
- 25,000 orders of AT&T for 1,000 shares each, a total of 25 million shares;
- 6,000 orders of Jefferies for approximately 667 shares each, totaling 4 million shares.
It was the roughly 4 million-share order for Jefferies that really caught the attention of the NYSE specialists and operations managers; the brokerage firm's average daily volume for the past 30 days is 3.4 million.
"Floor professionals recognized the problem before trading began, thus avoiding trading at incorrect prices on the NYSE," the exchange said in a statement.
"This speaks well to our market model, as the specialists detected erroneous orders and prevented a lot of money from being lost," adds an NYSE spokesman.
NYSE officials declined to confirm who originated the order, but sources say Fidelity was contacted after specialists alerted NYSE officials to what appeared to be abnormally large trades in the three stocks. Fidelity and/or NFS confirmed that the trades were made in error and the NYSE then proceeded with trying to restore imbalances in the three stocks.
The process took longer than just canceling the "bad" trades, because corresponding sell orders -- including 10 million for Wyeth -- came in prior to the open as the initial erroneous trades had Wyeth as indicated to open higher by $24.
The NYSE informed those would-be sellers that the buy orders were in error in the hope that the sales would be canceled; if not, those sales would have created an imbalance on their own. In addition, the stocks were trading off the exchange on electronic platforms.
Nasdaq Trades Canceled
Sources say the Nasdaq has canceled trades of 2.5 million shares of Wyeth that traded "off market" prior to the NYSE halt. The Nasdaq has invoked rule 11890, which refers to "Clearly Erroneous Transactions."
A Nasdaq spokesman referred me to its
trader alert, which states: "Pursuant to UPC Rule 11890, Nasdaq, on its own motion, has decided to break any and all trades in WYE, executed in Nasdaq, from 9:30:00 a.m. to 10:26:00 a.m., Eastern Time (ET), at a price at or above $58.55."
The statement says UTP Operating Committee participants, which include the Amex,
International Securities Exchange
and regional exchanges, "have agreed to use the same terms for breaking trades that affected their markets."
One investor, a hedge fund manager who shorted Wyeth into this morning's prehalt spike, is irate at having his trades canceled.
"This rule is focused on systemic problems like 'system errors' and has nothing to do with a dumb rumor driving a stock up," he says, noting some people were buying Wyeth this morning on speculation that
was going to acquire it. "If someone made a 'fat finger' mistake, great," he says. "If other people turn it into rumors and trade on it, that's their problem. It happens every day."
The source requested anonymity, citing the possibility of legal action against the Nasdaq, which claims the decision is "not appealable."
Undeterred, he said his "counsel is looking into situation," and he noted that the last time the Nasdaq canceled trades in this fashion, on
December 2003, the canceled trades were limited to a 12-minute block.
By contrast, Thursday's decision on Wyeth "cancels everything for nearly an entire hour," the fund manager says. "It is logical, if not obvious, to assume that whatever erroneous
emphasis on singular took place in Wyeth was shut off literally within a couple minutes. Thus, markets returned back to normal, and everyone else was trading off dumb Pfizer-for-Wyeth rumors going around this morning."
NYSE supporters will say this episode is a "victory for the humans" -- meaning, it's evidence that all-electronic trading, as occurs on Nasdaq, may be faster but doesn't provide the safeguards of the Big Board's hybrid system.
Aaron L. Task is editor at large of TheStreet.com. In keeping with TSC's editorial policy, he doesn't own or short individual stocks, although he owns stock in TheStreet.com. He also doesn't invest in hedge funds or other private investment partnerships. He appreciates your feedback;
to send him an email.