Computer Glitches Heaped Fuel on Stock Sell-Off

Wall Street’s Wednesday rebound helped repair some of the psychological damage caused by Tuesday’s 416-point loss in the Dow, but questions remain about computer malfunctions that may have contributed to the Dow’s plunge.

Dow Jones, which collects and reports market data, and the New York Stock Exchange (NYSE) indicated Wednesday that system problems helped accelerate the stock selling on Tuesday, when major averages posted one of their worst days of trading since the day after 9/11.

On Tuesday afternoon, the NYSE’s messaging system started to slow down. Then the Dow Jones industrial average — the closely watched index of 30 major stocks — plummeted 178 points in a single minute and about 240 points over the course of three minutes. In reality, the news of the sudden drop took about an hour and 10 minutes to wind its way to the trading floor.

When Dow Jones officials recognized NYSE data was not getting through in time and switched over to a backup server, the drop in the industrial average appeared to investors as an almost instantaneous and dramatic change.

“This switchover caused prices that were received during the latency period to be processed all at once, bringing the index immediately in line with its underlying component stocks,” Dow Jones said.

Working Overtime

It’s not clear how much the confusion impacted the overall stock decline. Not long after the glitch became known, the markets bottomed out for the session, with the Dow off nearly 550 points. Shortly afterwards, investors rallied the market and the major averages managed to recoup some losses before the closing bell.

Dow Jones took responsibility for the main computer glitch, but it wasn’t the only glitch.

The NYSE spent much of Tuesday night fixing the messaging system problems that caused the delays in trade reporting. In addition, it shifted more trades into the hands of specialists and floor traders when its automated system stopped processing trade requests properly.

By the end of business Tuesday, the NYSE expressed confidence that all trades had been properly cleared. The following morning, all systems were in working order when trading began, the organization said.

The NYSE Group, which runs the big board stock exchange using a combination of electronic trading and traditional floor-trading, announced late Tuesday that it was “assessing the situation” — the computer glitch was unrelated to its move toward a hybrid platform that combines the two forms of trading.

The problems were not limited to the NYSE. The Nasdaq experienced some delays Tuesday in confirming NYSE-listed stock trades. Similar issues were reported at the American Stock Exchange.

On Wednesday, Federal Reserve Chairman Ben Bernanke helped soothe investors with an upbeat growth forecast and by noting — as he testified before a Congressional committee — that no single factor led to the Tuesday sell-off.

Instead, a combination of events led to the stock market plunge — a sharp sell-off in China, higher oil prices and belief among many investors that a market correction was overdue.

Real-Time Solution

The heavy trading on Tuesday also caused some online brokerages to experience significant slowdowns on their Web sites, according to Web-performance monitor firm Gomez.

Though most major sites weathered the storm of orders, companies such as Vanguard, Bank of America and Fidelity Investments saw delays of up to three minutes when customers placed orders. Most of the time, it takes only a few seconds, said Gomez.

“Users trying to complete quote processes had to wait significantly longer times or were unable to complete multistep transactions,” Gomez reported.

Still, the fact that computers were responsible for exacerbating a dismal trading day may force markets to re-examine how to deal with such glitches in the future. Some traders and financial advisers may also have felt the stock exchanges let them down by providing information that didn’t accurately reflect real-time stock activity.

Even though the sheer volume of stock trading on Tuesday was cited for the delay in the reporting, investors have become accustomed to getting near real-time stock information regardless of market conditions.

NYSE’s Hybrid System

While Dow Jones maintains the stock market data, many questions were focusing on the NYSE, which is in the midst of a shift to a hybrid trading system that relies more heavily on electronic data exchange and less on the human stock traders and specialists.

Some investors would likely raise questions about the NYSE approach, Prudential stock analyst Robert Rutschow told the E-Commerce Times.

“Clearly, there would appear to be implications for the hybrid system and questions of reliability,” he said.

Most international stock markets now handle all transactions electronically, with billions of trades and trillions of dollars worth of stock swaps every day, most often without major hiccups.

Meanwhile, the Securities and Exchange Commission (SEC) may take a behind-the-scenes look at the NYSE systems to ensure the trouble will not happen again.

However, SEC spokesperson John Nester did not comment on whether an inquiry, formal or informal, was under way.