The New York Stock Exchange experienced technical issues at the open Tuesday. Dozens of stocks opened at prices well above or below their prior day closing prices. Most were halted shortly after the open under rules designed to damp down excessive volatility, and most reopened five to 10 minutes after the open at prices much closer to yesterday’s closing prices.
Stocks affected included big names like Altria, Mastercard, McDonalds, Uber, Wells Fargo, Verizon, Rio Tino, Shell, AT&T, Lilly, Mosaic, Wells Fargo, Nike, Nucor, Transocean, Prudential,3M, Newmont Mining, Southern, United Pacific, Sony, United Parcel Service, Altria, Valero Energy, Occidental Petroleum, Royal Dutch Shell, MetLife, Visa, Walmart, and Exxon Mobil.
The Big Board, owned and operated by the Intercontinental Exchange, later issued a statement saying “All NYSE systems are currently operational.”
Just prior to 11:00 a.m. ET, the NYSE issued a second statement: “The exchange continues to investigate issues with today’s opening auction. In a subset of symbols, opening auctions did not occur. The exchange is working to clarify the list of symbols. Impacted member firms may consider filing for Clearly Erroneous or Rule 18 Claims.”
“Clearly Erroneous” means the NYSE would determine that the initial prices in the stocks affected were not valid trades and the NYSE would determine that a later price would be the “correct” opening price.
What happened?
Every day, stocks open at the NYSE at or near 9:30 a.m. ET. There is only a single opening price, which is determined by thousands of orders to buy and sell individual stocks. These orders are aggregated into a single “book” for each stock that gauges overall supply and demand. A single price is then quoted at the open and all orders are aggregated into a single opening “auction print.”
For whatever reason, it appears that many orders to buy and sell stocks did not make it into the order book that determines the opening price, and that the opening auction print did not happen in those stocks affected.
The effect was that many stocks opened on very low volume and due to a supply-demand imbalance opened at prices far away from their closing price Monday.
To give two examples: Mosaic closed Monday at $48.35, but opened at $40.29, a drop of about 16%. It was halted almost immediately, but reopened at 9:43 a.m. at $48.00.
Walmart closed Monday at $142.64 but opened at $159.88, a jump of 12%. It, too, was almost immediately halted and reopened at 9:40 a.m. ET at $141.51.
What will the NYSE do?
The NYSE has already hinted it may bust all the initial trades of companies affected when it said, “Impacted member firms may consider filing for Clearly Erroneous or Rule 18 Claims.”
This is the most likely path because many investors who, for example, put in a market order to sell Mosaic at the open this morning were clearly burned (it opened down 16%) and would likely threaten lawsuits if not made whole, since the price drop had nothing to do with the company or external events.
Most likely, the “correct” opening price will be the price when the stocks reopened.
So what happened?
The NYSE has not provided an explanation. However, in the past these types of outages have been associated with software or security upgrades that caused snafus in the system.
On July 8, 2015, trading was halted for nearly four hours after the NYSE experienced what it called an “internal technical issue.” The NYSE later said, “The root cause was determined to be a configuration issue.”
In a separate event, faulty software brought down Knight Trading in August, 2012, in an incident which sent enormous amounts of erroneous orders onto the trading floor. The incident forced to Knight to sell out to a group of trading firms.
“Nine times out of ten, these problems happen because of a software change in the system,” one market participant who asked to remain anonymous, told me.