Friday, May 7, 2010

NYSE, Nasdaq Cancel Some Trades at Height of Thursday's Volatility

The New York Stock Exchange and the Nasdaq OMX Group say they will cancel trades involving stocks that saw sharp volatility at the height of the market’s steep intraday decline Thursday afternoon.

The NYSE Arca unit of NYSE Euronext (NYX: 29.85, 0, 0%) and Nasdaq, as well as other markets, planned to cancel all trades executed at prices that were greater than or less than 60% away from the last printed price prior to 2:40 p.m. Eastern time, up to 3 p.m.

The cancelled trades could change how the major indexes actually closed. For instance, there was a questionable trade in Procter & Gamble (PG: 60.48, -0.28, -0.46%) that many in the market blamed for accelerating the selloff, which, at its nadir, saw the Dow Jones Industrial Average off 998 points. It eventually closed down 347.80 points to close as 10520.32. There were also market rumors that a trader made an erroneous sell order for billions of shares of the e-mini futures traded at the Chicago Mercantile Exchange. CME Group (CME: 321.42, 0.03, 0.01%) said in a statement that its markets functioned properly and without issue.

READ List of Stocks Affected by Trading Cancellations

READ Nasdaq Rule 11890 on 'Clearly Erroneous Transactions'

Under the Nasdaq’s cancelled-trades notice, the P&G stock price would conceivably stand, but furious electronic trading caused several stocks to lose almost all of their paper value. Consulting firm Accenture (ACN: 40.5, -0.58, -1.41%), for instance, started the day at $41.94 a share, but a trade crossed for the stock at just 1 cent a share. That would effectively have wiped out $30 billion in market capitalization in a single trade.

Likewise, energy company Exelon Corp. (EXC: 41.7, -0.136, -0.33%) had a print cross at zero cents, wiping out nearly $29 billion in value.

Both stocks closed with far more modest losses. Neither trade actually crossed at the New York Stock Exchange, where both are listed. Rather, they were traded on electronic platforms.

The frantic selling is sure to revive calls for curbs on what’s known as high-frequency trading, which relies on computerized trades executed within fractions of seconds of either news or trades in other stocks. It is believed that the P&G trade – at $39.37, off an opening price of $61.91 -- prompted a steep drop in the value of the Dow, which, in turn, prompted programmed selling that cascaded into a freefall. Within 10 minutes, the Dow Jones Industrials fell close to 700 points – an unheard-of drop for a major stock average. But computers acting on algorithms, rather than traders, were in control of many of the transactions during that period.

Depending on which trades are cancelled, the calculations for the Nasdaq Composite and some of the Standard & Poor’s indexes could be adjusted. Conceivably, if P&G’s questionable trade is also cancelled, the Dow Jones Industrial Average could be recalculated, according to a Dow Jones spokeswoman. That would also mean that, at least from a historical perspective, the indexes never really had such sharp drops.

Still, because of the electronic trading and the steep slide, many stocks likely fell victim to collateral damage and those trades will have to stand.

There were other reasons to sell stocks, outside of the potential for bad trades, notably fears that Europe's sovereign debt crisis will spiral out of control.

The Dow Jones Industrial Average fell 347.80 points, or 3.20%, to 10520.32, the Standard & Poor's 500 dropped 37.75 points, or 3.24%, to 1128.15 and the Nasdaq Composite lost 82.65 points, or 3.44%, to 2319.64. The FOX 50 sank 28.40 points, or 3.33%, to 823.99.

The selloff, which left the Dow at its lowest point since early March, gained momentum as television images of protests outside Greece's parliament triggered big fears that Europe won't have the political will to get its debt crisis under control.

“The tone and tenor of the global debt crisis has taken over the market. Everything else has taken a back seat,” said Peter Kenny, managing director at Knight Capital Partners. "This is a currency crisis that has the potential to blow up into a global financial crisis. The only thing that’s going to turn this thing around is action.”

“Calmer heads prevailed. The U.S. is in a much better place than the rest of the world,” said Brian Belski, chief investment strategist at Oppenheimer. “This is what capitulation feels like.”

Regardless, the Dow still posted its steepest percentage drop since April 2009 and largest point drop since Feb. 2009 amid growing fears that Greece's debt crisis will spread to other high-debt European nations like Portugal and Spain. Underscoring the volatility on Wall Street, the VIX, or so-called fear gauge, soared 50% to fresh 52-week highs.

“The market went into a panic. No one made markets. You had all the machines trying to [sell] things into an abyss,” said Peter Boockvar, equity strategist at Miller Tabak.

At their lows, the blue chips were on track for their point decline in history, exceeding the 777-point drop in 2008 when the House of Representatives voted down the TARP bailout resolution.

In addition to the bad trades and the global worries that have weighed on U.S. markets, stocks were hurt by weaker-than-expected same-store sales reports from a number of retailers, including Target (TGT: 54.1875, -0.7325, -1.33%), Gap (GPS: 22.34, -0.54, -2.36%) and Aeropostale (ARO: 27.56, -0.11, -0.4%).

All 30 blue-chip stocks lost ground. The Dow has tumbled 631.5 points, or 5.66%, over the past three sessions, its largest three-day percentage drop since March 2009 and first three-day decline of any kind since late January.

The euro plunged 1.58% to $1.2619 as cash fled to the relative safety of the U.S. dollar. The stronger greenback sparked a wave of selling in commodities and multinationals. Crude tumbled to a fresh 11-week low, losing $2.86 a barrel, or 3.58%, to $7 down as much as $22.79 at one point.

The debt woes also rattled the bond markets as the yield on the ten-year note fell to its lowest level since Dec. 2009 amid the flight to safety. Bond prices experienced heavy volatility, mirroring the action on Wall Street.

"In my 25 years in the business I have never seen bonds have that type of move in a 20-minute period," said Tom Digaloma, head of bond trading at Guggenheim Securities.

Wall Street was also hurt by weak sales reports from a number of retailers, raising concern about consumers’ ability to continue to withstand high unemployment. Surprisingly strong consumer spending, which accounts for 70% of the U.S. economy, has helped propel the markets and the economy. According to Thomson Reuters, April retail sales were up just 0.5% from a year ago, missing forecasts from analysts for a 1.7% rise. In fact, almost 70% of retailers reporting results missed expectations.

Friday’s jobs report, which tends to be one of the most influential reports of the month, was completely overshadowed by the global jitters. Economists expect the Labor Department will say the U.S. created 185,000 jobs last month and the unemployment rate stayed steady.

Ahead of that report, the government said Thursday the number of people who filed for unemployment insurance fell last week by 7,000 to 444,000, nearly matching the Street’s view. Continuing claims, which are filed by those on unemployment insurance for more than a week, fell by 59,000 claims.

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