30,000 Bad Option Fills on Friday 02-24-12

Discussion in 'Wall St. News' started by Options12, Feb 25, 2012.

  1. Options12

    Options12 Guest


    --Rush of orders hit Amex at erroneous prices shortly after market open Friday

    --Signs of automated trading system that ran off course, traders say

    --NYSE Amex officials continuing to review, adjust transactions

    (Updates with details on error trades, background on regulation.)

    By Jacob Bunge

    NYSE Euronext's (NYX) Amex options market was flooded with more than 30,000 erroneous trades on Friday in what traders said was likely an automated strategy that ran off course.

    The cascade of orders hit the Amex options exchange just after it opened Friday, offering to trade call and put options contracts in small numbers at prices wildly off the going market rate, according to traders.

    NYSE Euronext told customers in a notice this afternoon that the exchange was in the process of reviewing and adjusting some of the prices at which the trades were done, in keeping with exchange policies governing so-called "clearly erroneous" trades.

    "NYSE Amex Options appreciates your continued patience as we work through this issue that has impacted in excess of 30,000 one-lot executions," exchange officials wrote in a notice. The Amex, based in New York, is the fourth-largest U.S. options exchange by volume of contracts traded, according to figures from the trade-clearing firm OCC.

    An NYSE Euronext official confirmed that the incident was not driven by any glitch in the Amex exchange's operations. Traders said it appears to have been caused by a market-maker's trading systems.

    The glut of small-sized trades hit the market over a three-minute period beginning at 9:30 a.m. EST, and staff at NYSE Amex began reviewing the transactions shortly after 10 a.m.

    "It was obvious to us that there was some error occurring," said Jeff Shaw, head of trading for Timber Hill, the market-making unit of Interactive Brokers Group Inc. (IBKR), who said he observed the rush of orders onto the Amex. Timber Hill was not behind the trades in question, he said.

    More than 450 options symbols were under review for mistaken trading, including Apple Inc. (AAPL), Wells Fargo Inc. (WFC), J.P. Morgan Chase & Co. (JPM) and International Business Machines Corp. (IBM), according to a notice NYSE Amex sent to traders.

    Exchange officials were still reviewing and adjusting transactions late Friday.

    "These things happen every couple of years, where a market maker or liquidity provider ends up with a major, marketwide glitch," said Henry Schwartz, president of Trade Alert LLC, which analyzes options market trading.

    New rules developed by exchanges to "adjust" error trades, bringing the price of such transactions more in line with the prevailing market, have made such episodes easier for exchanges to navigate, Schwartz said.

    Exchanges and market regulators in recent years have coordinated efforts to standardize responses to mistaken trading and implement new electronic safeguards to catch such orders before they make it into the market.

    Market authorities now are considering stiffer sanctions for firms that repeatedly make erroneous trades, or mistakenly place a very large trade far away from a rational price. The main concern is that errors embedded into a powerful trading program could snowball into a marketwide event that rolls across multiple markets and ensnare large numbers of investors.

    -By Jacob Bunge, Dow Jones Newswires; 312 750 4117; jacob.bunge@dowjones.com
  2. Eight


    I was using a dynastore product that interfaced Tradestation 2000 to IB via dll calls. I found a bug in it; when prices were under $.10, it put in orders at $10!! I never got filled on one fortunately..

    hmm, wait... I could have recommended the product very highly then in the premarket or post I could look for limit orders that were...
  3. Bob111


  4. piezoe


    "An NYSE Euronext official confirmed that the incident was not driven by any glitch in the Amex exchange's operations. Traders said it appears to have been caused by a market-maker's trading systems."

    The first sentence is misleading. We wouldn't expect the exchange to "drive" an incident such as this. We would, however, expect its software to recognize and invalidate clearly erroneous trades. Poorly designed exchange software I say. In this age of computer driven trades, the exchange software has got to be capable of recognizing and invalidating erroneous trades.
  5. Options12

    Options12 Guest

    Good point. Who discovered the bad trades first -- AMEX or Timber Hill?