New York – According to reports from Bloomberg, confusion swept trading on August 20 as prices for equity derivatives swung without reason, leading to speculation a computer program had gone haywire at one of the 12 U.S. options exchanges. Contracts traded for $26 one minute and $1 the next.
The technology problem was preventing orders for listed contracts to be properly executed, and it reportedly took some time before traders were informed of the cause of the problem. According to Scott Maidel of Russell Investments, his firm was not contacted until twenty minutes after the start of trading, when the problem was first noticed.
Some traders vented their frustration that the problem happened in the first place. Daniel Brady of Entropy Capital in San Francisco said that ‘I traded with someone and seven hours later I still wasn’t 100 percent sure that the trade was good. It’s unfair to the counterparty. They don’t know exactly what their position is until several hours later in the day. What are they going to do?’
A spokesman for the NYSE Euronext’ Amex Options said that they anticipated ‘that most of the impacted trades would be busted.’ In an email statement on the issue, Goldman Sachs claimed that any potential losses from the event would be within the firm’s risk limits. Last year, Goldman generated almost $ 6 billion in revenue from equities trading.
The breakdown is just one of a growing number of trading failure that has followed the expanding complexity of global financial markets. U.S. equity trading, which started in an open market in lower Manhattan, has become so complex that at least 50 computerized platforms now power the market.
Ultimately, the growing complexity is getting to a point where it is almost impossible to control, and the Goldman error was followed by a three-hour trading outage on the NASDAQ (NASDAQ:NDAQ) on August 22. While NASDAQ blames the failure on a glitch at the rival NYSE, it is expected that the NASDAQ failure could have caused tens of millions in trading losses. Brokers the failures are unacceptable, they are pushing for the exchanges, in this case NASDAQ, to more clearly define their systems to prevent failures including operating multiple, competing feeds to that brokers, and investors can switch if the primary feed fails.