HFT ... one more time

Nasdaq suffers fresh high-profile gaffe

By Arash Massoudi and Alan Rappeport, FT.com

October 4, 2012 -- Updated 0037 GMT (0837 HKT)

Nasdaq suffers a new technical glitch that cancels trades in Kraft Foods.

STORY HIGHLIGHTS

• Nasdaq suffered its second high-profile embarrassment in six months
• Forced to cancel trades in Kraft Foods after a trading glitch cause shares to soar
• Came a day after market regulators met over concerns on the impact of technology
• Comes after Facebook, Knight Capital trading blunders in recent months

(Financial Times) -- Nasdaq suffered its second high-profile embarrassment in six months when it was forced to cancel trades in Kraft Foods after a trading glitch caused the company's shares to soar nearly 30 per cent.

The error marred the completion of the recently split group's switch to Nasdaq and evoked memories of the exchange's botched handling of the Facebook flotation in May.

The trading error and cancellation came a day after US regulators met to address concerns about the impact of technology on market stability. Weeks after Nasdaq's bungled handling of Facebook's public offering, a software error at Knight Capital caused the electronic trading and brokerage company to suffer a $440m loss, sending it to the brink of bankruptcy.

Kraft shares, which together with Mondelez, the global snacks group created in the split, switched their listing from the New York Stock Exchange to Nasdaq, surged as much as 28.9 per cent to $58.54 in the first minute of trading seconds after Irene Rosenfeld, the company's former chief executive, rang the market's opening bell.

Computer glitch that cost millions

Within an hour, Nasdaq and other stock exchanges conducted a review of the processed trades, deemed them erroneous and cancelled them.

Initial investigations suggested the erroneous trades were the result of a faulty trading algorithm. The episode highlights concerns among some market participants that the speed of transactions, driven by technical advances, often leaves the market susceptible to potentially hazardous errors.

"That's the problem with our market structure today, there is no room for any type of error," said Sal Arnuk, co-head of Themis Trading and a critic of high-frequency trading. "These electronic trading systems and the HFT market-makers are set up to inflict the maximum amount of pain on any mistake."

Kraft's shares quickly retreated after the trades were cancelled and closed down 1.2 per cent to $44.87.

"Participants should review their trading activity for potentially erroneous trades and request adjudication through the 'Clearly Erroneous' process within the applicable timeframe for filing pursuant to the rule," Nasdaq said in a statement.

Kraft said the company was looking into the situation but declined to comment further.

"Trading in Kraft was affected by a broker error that impacted multiple stock exchanges," Nasdaq said. "Nasdaq's systems performed normally and the industry's process for handling these issues worked as intended." The exchange declined to name the company where the trading error originated.

Eric Hunsader, chief executive of Nanex, a market data company, said the problem appeared to be an algorithm that was trying to buy 30,000 shares in Kraft but did not want to skew the market by buying them all at once. "The trades were spread out by milliseconds and look to have executed at 11 different trading venues," Mr Hunsader said.

Ms Rosenfeld decided last year to separate Kraft into a US grocery business, which would maintain its name, and an international snacks business to be called Mondelez, which she would lead.

Kraft said last June that both companies would be listed on the Nasdaq, dealing a blow to the NYSE. The move surprised some after glitches occurred during the opening minutes of trading for Facebook but Kraft said it was confident in Nasdaq and that it had been drawn to the exchange's liquidity and cost effectiveness.

© The Financial Times Limited 2012