(The following guest post is an actual letter sent from an NYSE floor trader to New Jersey Senator Robert Menendez. The author prefers to remain anonymous.)
Senator Robert Menendez,
I have worked as a broker on the floor of the New York Stock Exchange and over the last 8-10 years I have seen one of the most dramatic changes to an industry that anyone has seen – from a pen and paper open outcry system to a market that is almost completely reliant on computer programs. Stock trading has become lighting fast, which I think is harmful to our market and our economy as a whole. To say technology has gotten ahead of the regulators is an understatement. While lots of time and energy has been spent shaping the financial reform bill in Congress, I do not see anything in the legislation that addresses what happened this past Thursday: the Dow Jones traded down almost 1000 points in just a few minutes, wiping out $1 trillion in wealth, and some blue-chip stocks traded as low as 1 cent.
One of the main points I want to stress is that this past Thursday there was not an error, a “fat finger”, or a system malfunction that caused this huge sell-off. This is just how today’s market is structured, and it can and will happen again if nothing is changed. There needs to be a uniform policy in place that all the exchanges follow, such as individual stock circuit breakers, which the NYSE already has in place. The NYSE for years has had a system to “slow down” trading during extreme market volatility; this slow down is called a Liquidity Replenishment Point or LRP. The idea is for the NYSE, during extremely volatile times, to give the rest of the market an opportunity to step in, buy stock, and stop the sudden free-fall. During this 30-90 second period, the computer programs wait to replenish while humans step in to find the right price to trade a block. Then the trading goes back to normal. Common sense shows this is the right thing to do.
None of the wild price “aberrations” in stocks such as in PG, ACN, & MMM traded on the NYSE floor; they all traded on completely electronic exchanges such as Nasdaq, Direct Edge, & BATS. The problem is, unfortunately, that none of the other electronic exchanges have to follow the NYSE lead and slow down during this extreme volatility. Sell orders which were sent to these other exchanges had very little liquidity and very light bids to interact with, which in turn drove the stocks down. Technology has come a very long way in the past 8-10 years, but it has gotten to a point where enough is enough. Computer programs and algorithms do make sense at times when stocks are trading smoothly and there is little to no volatility, but there needs to be times when humans come in to the picture and provide an orderly market.
The argument on the other side coming from Nasdaq is that the NYSE model of going slow is in fact what caused the sell-off in stocks. However, out of the 281 stocks Nasdaq canceled trades in, 193 of them were ETF’s. The NYSE does not trade ETF’s, so there is no way the slow market is what impacted them. Further, the NYSE did not have to cancel ANY trades. A human would not sell stock down $3, $5, or $10 in milliseconds; the brakes have to be applied in certain circumstances because the consequences are too great on investors, retirement plans, pension funds etc. To most of the investing public, price is a lot more important than speed.