Why Are We Still Canceling “Erroneous” Trades?

In case you missed it, there was a little bit of “flash crash” activity in a few handfuls of stocks.    This bothers some people more than it bothers me:   I am fully aware that other market participants doing dumb things creates opportunities for me.   Trading like an idiot – and these were idiotic trades – is not a crime.

However, when we (by “we”, here,  I mean: “those who make the rules that govern our markets”) let those idiots off the hook by canceling trades, the story changes.

A quick tangent:  in my prior life I was a trader at a large bank/broker-dealer.   I spent part of my career on a large program trading desk executing baskets/portfolio trades:  large volumes in large numbers of stocks at once.   We were very very careful about what we were doing, because if we pressed the wrong button, we could accidentally send our entire inventory to the Floor (it existed back then!) for execution.   We had multiple checks built into the system including limits on any single order size and the amount of volume any one trader could send in a day – all designed to prevent erroneous orders FROM OUR END – regardless of any policy the Exchange had.   Every trade had a confirmation window that needed to be clicked.  /tangent

This is not a new topic on these pages:  we should avoid canceling trades at all costs.   Since The Flash Crash in May 2010, regulators have instituted circuit breakers in our markets to prevent the kind of price action that is often associated with “erroneous trades.”   As I noted in the post linked above: “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.”   I kinda thought this was what the circuit breakers did.

Yesterday the exchange only canceled trades in one stock: $AOL – and only a few of the trades: the ones at or below $33.17.  Still, I have a simple question:  WHY?

Why were these trades canceled?  Oh yeah – I have another question: WHO?  Who sent the “clearly erroneous trades?”  Actually, that brings up a third question:  WHAT?  What is being done to this erroneous-order-sender in terms of sanctions/punishment to discourage this kind of erroneous order entry in the first place?

I noted on Twitter last night:






There are lots of people making lots of noise about market structure.   To me, the issue at hand in this post is one of the simplest, and endemic at the root of what others find problematic.   Even better – the issue cannot be more simply stated: it’s the kind of thing EVERY Congressional panel about market structure should be asking:

WHO sent these trades?

WHY are they not being held accountable for their order entry?

WHAT is being done to sanction the guilty parties and prevent this from happening in the future?  Mulligans do not lead to accountability.

Or, we could continue to let the guilty party off the hook every time they send erroneous orders,  just rant and rave about populist nonsense and not solve anything.


HFT: The Little Guy Is the Big Winner

Dear NYSE: Canceling Trades Destroys The Integrity of the Market

Don’t Cancel Trades!

Algos Gone Wild – Stupid Computers Are Good For Smart People

Dear Knight: Thank You.  Dear Themis: Relax

Ban Market Orders


PS – the WSJ article on the subject has graphs of some of the affected stocks.  Note the time scale: this price action happened (and reverted) so quickly, you probably wouldn’t have even seen it if you were looking at the names in question.

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