Another month, another high-frequency trading algorithm gone wild. Although investigations are still ongoing, what seems to have happened is an algorithm trading for Knight Capital Group, a market maker (a company which provides liquidity to the market), went a bit mad around 10am EST.
Business Insider's Eric Platt gives us this chart, of Vanguard Utilities ETF, as an example of what went wrong (click for big):
The green circles are best bids – the price people are willing to buy at – and the red circles are best asks – the price they're willing to sell at. Until around 9:59, the two were roughly in sync. A slight divergence then happens, but comes under control a couple of seconds later. But at 9:52:21, the two prices fly apart.
Once Knight Capital realised they were the problem, they started telling traders to take their business elsewhere, and released the following statement:
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. Knight notified its market-making clients this morning to route listed orders away. The company’s OTC securities and trading in its other businesses are not affected. The company continues to review internally.
The company is taking a pasting, with shares down a third on what was previously a steady base:
In the end, the New York Stock Exchange actually cancelled the trades for six of the worst affected symbols, rolling back anything made for more than 30 per cent above or below the opening price.
It's hard to even call what happened yesterday "breaking", as such. It's just another chapter in the byzantine workings of high-frequency trading.