'Brief' NYSE System Error May Have Affected Prices
Traders Magazine Online News, January 17, 2013
NYSE Euronext said it experienced trouble routing orders to three other exchanges at the outset of trading Wednesday, from its New York Stock Exchange and NYSE MKT exchange.
Some orders may not have gotten the best available price, making NYSE Euronext the third U.S. operator to experience order handling issues affecting the prices customers get in the last month.
The “brief issue” occurred between 9:30 a.m. and 9:34 a.m. Wednesday, according to a trading alert.
The notice said that NYSE Euronext said “executions at the NYSE and NYSE MKT may have traded through protected quotes” at Direct Edge’s EDGA and EDGX exchanges and an equities venue operated by the Chicago Board Options Exchange.
The “trade through” rule of National Market System regulations put in place in 2007 by the Securities and Exchange Commission requires orders to be executed at the best available price, on any exchange. This indicated that may not have occurred on an unspecified number of orders yesterday morning.
The issue was corrected by 9:35 a.m., the NYSE said, and normal routing of orders to other exchanges resumed.
Neither the NYSE nor NYSE MKT received any complaints from customers, NYSE Euronext said.
Failure to adhere to the “trade through” rule accounted for 439,000 of the 442,600 mispriced transactions that BATS Global Markets last week disclosed in its own system error message. Those errors occurred from October 2008 through this month.
Direct Edge also disclosed in a Dec. 28 trading notice and a Jan. 11 update that it had discovered two separate order-handling discrepancies that may have led to poor pricing for some customers.
The company said it fixed one of its computational problems in time for trading January 14. The other won’t be fixed until “on or about February 15.”
“This is infuriating,” said Eric Hunsader, chief executive of Nanex, a Chicago-based developer of streaming market data technology, after the Direct Edge disclosure. “It’s like they don’t even look at their code.”
Handling of orders has become much more complicated as NMS and Alternative Trading System rules have encouraged the proliferation of national exchanges, which now total 13. Competition among the exchanges for customers has led to increasingly complex “unique order type combinations” that must be carried out in conjunction with the rule to trade through to best bid or offer found instantaneously on any of the exchanges.
But the “trade through” rule may not be necessary to achieve “best execution of orders,’’ says Georgetown University markets expert James J. Angel.
"Here's the thing,’’ he said. “The trade through rule sounds great, in theory. Oh, yes, everybody has to get the best price. But, you know what? Brokers already have a duty of best execution to their clients.’’
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