In Chicagomore than a thousand kilometers from Wall Streetthe data backup center of the New York Stock Exchange (NYSE, for its acronym in English) must be ready around the clock in case a disaster strikes in the largest stock market in the world.
When the markets close, the routine is for NYSE staff to turn the systems on and off to make sure everything is working. But on Tuesday an employee did not properly shut down the disaster recovery system and this caused… a disaster.
That human error, described by people with direct knowledge of internal NYSE trading, is what triggered wild swings in the market when trading opened Tuesday morning in Manhattan. The chaos affected more than 250 companiesincluding Wells Fargo, McDonald’s, Walmart, and Morgan Stanley, and in some cases caused stock prices to swing 25 percentage points in a matter of minutes.
The episode has led the stock market to cancel thousands of deals at a cost that has yet to be determined. Meanwhile, there is nervousness among market professionals and traders, awaiting more details from the exchange on what it publicly called a “manual error” related to its “disaster recovery setup”.
“They are going to have to come up with a better explanation” to reassure investors and regulators, he said. Joseph Saluzzi, partner and co-founder of Themis Trading LLC, whose firm managed to avoid losses. “Although systems fail, and we understand that, there is zero tolerance when it comes to the opening and closing of the market.”
In simpler terms, according to one of the people, the confusion was due to the backup system in Chicago was left on. That tricked the exchange’s computers into treating the 9:30 am opening bell as a continuation of trading. Therefore, they ignored the opening auctions of the day that clearly set the initial prices.
Without that routine step, they arrived offers with all kinds of prices. That quickly activated mechanisms designed to prevent aggressive swings in the market, setting off alarm bells on trading screens everywhere.
NYSE executives spent hours trying to identify the problem until they were certain there would be no further consequences, said the people, who spoke on condition of anonymity. Officials also began reviewing whether trades could be labeled “clearly wrong” under market rules and then cancelled. Shortly before 3 pm on Tuesday, the exchange announced that it would reverse the most extreme trades.
(With information from Bloomberg)