Dear NYSE: Canceling Trades Destroys The Integrity of The Market

Dear NYSE,

So earlier I wrote a post about how today’s market action really wasn’t anything that should make any of us want to run around screaming that the sky is falling.  In that post, I said that if the NYSE canceled trades, I was going to join Themis in their crusade.

Well, the NYSE canceled trades in a few names – the ones with big, “clearly erroneous” moves: the threshold used was 30% or more away from the opening price.   It’s good that the NYSE didn’t cancel the bulk of the trading action from this morning, but there isn’t really a good reason that I can see why they should be canceling trades at all.   Are these trades any more “erroneous” than all of the other trades in 135 other stocks this morning? Were the trades in the other 135 affected names not erroneous?  Don’t answer those rhetorical questions.

My question for you, New York Stock Exchange, is this:  What is being done to prevent this from happening again?  If you’re going to cancel trades, you need to be working on a way to prevent erroneous trades from happening.   The existing circuit breakers didn’t get tripped because this morning’s trading was actually pretty orderly: that’s how a market is supposed to work when one party does something crazy:  the Market takes care of it, and charges the offending party for the liquidity provided.  You want to pay $6 for $ARC?  No problem: sold to you, sucka.

Will the offending firm behind these “clearly erroneous” trades be losing their privilege to execute trades on the NYSE?   I kid, I kid – I highly doubt that’s going to be the result, but maybe it should be.   NITE, or whomever was responsible, cannot be allowed to execute orders like this and have their errors canceled 6 hours later, leaving other traders in the lurch.

If you don’t want stocks to move more than 30% from their opening print, why don’t you just halt stocks when they move 30% from their opening print, until The Exchange can determine if it wants to allow trading to continue?  I’m not saying that I would generally advocate for hard price halts, but if the alternative is to come back six hours after the price action and start canceling trades, why not just halt the stocks at the time at whatever threshold floats your boat?

Markets rely on participants who will be willing to stand and provide liquidity when prices get out of whack.   This morning, we actually saw a pretty robust example of exactly that:  prices moved irrationally and others stepped in to “rectify” the situation.  Canceling trades 6 hours later removes incentive for traders to step in and fix such mispricings:  how can one take the other side of a trade and then manage his risk accordingly if he doesn’t know when the exchange will come back and nullify his trades?

My view on this is pretty clear, and, I think, logical, rational and sensible: if you’re going to cancel trades, figure out ahead of time what constitutes a trade that can be canceled, and prevent the trade from happening in the first place.   As I read your CEE (Clearly Erroneous Executions) policy, I don’t see the “30% from the opening print” rule in there.  But if it is indeed a rule, then the stocks should be halted before the trades occur.

best,

KD

disclosure: I did not trade any of the symbols with canceled trades today.  I traded one name, $HLF, whose price action was affected today, but my order was never in jeopardy of being canceled, as I waited until well into the “bounce” to buy the stock.

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