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The Almighty Buck Bug

Computer Glitch Causes Havoc and Losses on Nasdaq 324

goombah99 writes "In an illustration of how fragile the electronic stock market system is the NY Times is reporting how a tiny computer glitch rippled through the Stock Markets with buyers who bought low and sold high taking huge losses. An erroneous large sell order was entered. Many people bought at this low price, then signed options contracts to sell these at higher prices, locking in a profit. Or so they thought utill the erroneous low sell order was removed. Now to honor their options they had to buy the stock at a higher price. Since exchanges trust each other's trade prices it rippled throughout the system. There does not seem to be any way to gracefully undo such errors."
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Computer Glitch Causes Havoc and Losses on Nasdaq

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  • Hmm.. (Score:5, Interesting)

    by Wigfield ( 730339 ) on Saturday December 06, 2003 @04:05PM (#7649718) Journal
    What if some smart but malicious programmer rigged the system for his own profit? I know this example here is a glitch, but perhaps in the future...
    • "I told them I'd burn the place down..."
    • Re:Hmm.. (Score:5, Funny)

      by macdaddy357 ( 582412 ) <macdaddy357@hotmail.com> on Saturday December 06, 2003 @05:35PM (#7650285)
      After the damage was done, the ticker read,
      "YoUvE bEEn HaxOreD fuXOrS
      Suckee it down!
      wOOt!"
    • Re:Hmm.. (Score:5, Informative)

      by Anonymous Coward on Saturday December 06, 2003 @08:52PM (#7651212)
      What if some smart but malicious programmer rigged the system for his own profit? I know this example here is a glitch, but perhaps in the future...

      I work for the company in question, and I assure you this is not the case. What basically happened is that the feature which would auto bail-out of a losing position which was in place for client X was discovered and used by client Y, who wasn't even supposed to know about it. Client Y added the setting to support autobail, but didn't include a lag time to send the orders.

      Thus, the order was sent thousands of times before the error was noticed.

      For it to have been malicious, the programmer would have had to have contact with the client in question, which is not the case. It was a multi-layered mistake, plain and simple.

      • Re:Hmm.. (Score:5, Insightful)

        by schon ( 31600 ) on Sunday December 07, 2003 @11:49AM (#7653702)
        the feature which would auto bail-out of a losing position which was in place for client X was discovered and used by client Y, who wasn't even supposed to know about it.

        Ahh, security through obscurity.

        I hope that appropriate action is taken against whoever decided that was the best way to prevent the feature from being used by an unauthorized party.
    • by Morgaine ( 4316 ) on Saturday December 06, 2003 @09:50PM (#7651476)
      Anyone that's done some control theory knows how to solve the problem --- just add some hysteresis into the feedback loop, ie. response delay in both directions.

      All forms of instability are reduced in their effect by this means, so it doesn't matter whether the instability stems from human error, bugs, or system glitches arising from other things.

      And exactly how would one do this? There's a ton of ways, and quite a few of them simply entail holding quoted prices steady for a mandated period, plus a few adornments.

      There are much more creative ones around though which could probably work even better, like allowing only audio readouts in trading rooms so that info comes in slowly like in tickertape days, or the one I like best, allowing traders to use no equipment other than the morning's financial newspaper, plus a pen and notepad. :-)
  • Poor slobs. (Score:2, Insightful)

    by Highlander ( 93036 )
    I wonder how many people got fired because of it.

    H.
    • Re:Poor slobs. (Score:3, Interesting)

      by LostCluster ( 625375 )
      Maybe a whole company. Archipelago now has a lot of explaining to do about their regulatory practices. The stock market system depends on self-regulation by the exchanges, and this newcomer got caught making a very questionable early decloration that things were all clear, while NASDAQ took longer but got made the right call. Archipelago then got reduced to copying off of NASDAQ's homework, and leaving some of its own customers holding the bag.
  • One Dollar (Score:5, Funny)

    by wud ( 709053 ) on Saturday December 06, 2003 @04:05PM (#7649722) Homepage Journal
    I bet we can make the two of them poor, while making the two of us rich.
  • Virus (Score:3, Funny)

    by instanto ( 513362 ) <`on.enilno' `ta' `htrabat'> on Saturday December 06, 2003 @04:06PM (#7649727) Homepage Journal
    I wonder how a Virus Attack (Specially Crafted) on Wall STreet would play out.. Could be interesting.

    (Or,maybe they run Norton SystemWorks... )

    • It wouldn't be a virus. It would just be straight hacking.

      Why would anyone make some fancy virus for a one-time job? It might involve using a virus, or not, but I'd think it would be more just direct work on security holes.
    • Re:Virus (Score:2, Interesting)

      by Anonymous Coward
      They (mostly) run OpenVMS. Good luck with the virus.

      Anonymous Ex-Deccie coward
  • by Chairboy ( 88841 ) on Saturday December 06, 2003 @04:06PM (#7649728) Homepage
    In a Tom Clancy book (Debt of Honor, I think), a computer programmer takes advantage of a weakness in the stock market to induce a crash. After a week of the market shut down, they recover by resetting the prices to where they were the day before the glitch and instructing stock brokers on steps to avoid re-creating the crash.

    It doesn't apply to this situation, but the specifics of how they do it is interesting for anyone who might want to check out the book.
    • Yes, its the Debt of Honor. But another thing that work in their advantage is that NO record was kept due to the glitch, therfore they could reset the entire stock market and basically declare all tradings done during those days were void.
    • yeah, it was Debt of Honor. The same one that ended with a disgruntled japanese airline pilot taking out the State of the Union address with his jumbo. Seeing as how the relevance of this text to our modern times can be interpreted so much more easily than the bible can, I move to have it declared the new holy document and Clancy recognized as our lord and saivor.
    • by Slashamatic ( 553801 ) on Saturday December 06, 2003 @08:39PM (#7651156)
      The problem of trading back from a point in the past (as in more than one business day previously) is that you have to reverse settlements that have happened. Shares tend to stay on the depository system so they are easier to deal with (although this would need some hacking at the registrar as well), but cash gets transferred out of the control of market participants. For the shares, well generally, you are just a beneficiary name on a computer somewhere and the shares exist just as a global 'certificate' with the nominee set to the depositary account holder. Cash gets moved, generally very quickly and also internationally. For example, I sell GM for dollars at the NYSE, switch the dollars to Eoros and then use the proceeds to buy VW in Germany on Xetra. Two distinct markets, and a forex transaction.

      Clancy was a bit simplistic there - it would be a hell of a rollback.

  • by Anonymous Coward on Saturday December 06, 2003 @04:06PM (#7649732)
    ... that the glitch caused SCOX to fall even more :)
  • by microcars ( 708223 ) on Saturday December 06, 2003 @04:07PM (#7649736) Homepage
    start stocking up on toilet paper and gold coins!
  • Do over!!! (Score:5, Funny)

    by El Cubano ( 631386 ) on Saturday December 06, 2003 @04:07PM (#7649738)

    Remeber being a kid and playing some game (like baseball or soccer)? What happened when someone really screwed up? or did something thinking they were allowed? You called "do over!!!"

    That is the solution. On Monday morning, all of the trading managers go out on the floor, and start off the day by yelling "do over!!!" Every trader's account is reset to its pre-Friday state, and everyone is happy. Duh, it's so simple.

    • by Pac ( 9516 )
      Think about it: people who bought and sold the erroneously priced stock can undo their sells and buys. Now the people who bought from those first generation buyers must be allowed to undo also. In the second generation a new problem arrises: these people have no reason to undo nor do they have done anything wrong - you bought a car, paid $1000 instead of $10000 because the clerk at the store made a mistake and sold me the car for $5000: why should be forced to give you the car back when the store come to co
      • by gertsenl ( 719370 ) on Saturday December 06, 2003 @04:34PM (#7649907)
        I say there's a real simple way to solve this, no logistic or legal mess. Make them make good on the original sell order. They, in turn, want to sue the software developer? Let them handle that on their own time and out of THEIR pockets.
      • by zeno_2 ( 518291 )
        One of my old friends I used to work with went into staples, they had a coupon or somethin where one of the Sony Digital Mavica camera's was like 250 bucks. The coupon said "limit 2", but for some reason the clerk thought this meant, you get 2 for 250 bucks. My friend had paid with a credit card, and walked out with 2 cameras for 250 bucks. A day or so later he got a call from the Staples manager, the manager wanted him to come in and take one of the camera's back. Of course my friend didn't do it, but
        • by Sancho ( 17056 )
          If you're going to scam a store, it's best to do it with cash. Then they can't even call you, and they certainly can't try to charge you for the device after-the-fact. I'm surprised that didn't happen in this case.
        • by gilroy ( 155262 ) on Saturday December 06, 2003 @07:55PM (#7650945) Homepage Journal
          Blockquoth the poster:

          Of course my friend didn't do it

          It disturbs me that no one seems to question this "of course". Your friend was wrong. He made an unjustifiable profit on a mistake made in good faith by the clerk -- a mistake he clearly recognized as such. What he did might have been legal but it was wrong. And yes, I'm the kind of guy who goes back to a store if I discover I've received too much change.
  • Wonder if this is yet another argument to open sourcing critical projects so many more people can watch and debug it. I know, I know -- lots of vulns found on OSS lately, but I'd still rather trust systems where I can see the code if I needed to do so.

    While I'm at it, how many SCO stocks did it manage to fsck up?
  • by ejaw5 ( 570071 ) on Saturday December 06, 2003 @04:10PM (#7649755)
    Lisa: Wow, Dad, you're surfing like a pro!
    Homer: Oh, yeah! I'm betting on Jai-alai in the Cayman Islands, I invested in
    something called "News Corp"--
    Lisa: Dad, that's Fox!
    Homer: [shrieks] Undo! Undo! [hits key, sighs]
    • I remember watching that episode after trading in an out of News Corp all day. Made me laugh. Shame you can't undo bad trades like on the Simpsons, though.
  • Just call a do over. People learn do overs when there like 5 years old. I think I've for the FIX message ID for a do over. We call monday tuesday and everyone learns a few lessons.
    • No, no do-over. These folks were trying to exploit a bug to buy stocks at well below the going price and sell immediately, and they got burned. Giving them a do-over would be wrong, since if it had worked for them they would have gotten free money they did not deserve.
      • Re:Easy Fix (Score:5, Interesting)

        by Gunzour ( 79584 ) <gunzourNO@SPAMgmail.com> on Saturday December 06, 2003 @05:03PM (#7650072) Homepage Journal
        Nobody knew it was a bug at the time. They simply saw the price dropping dramatically and decided to take a risk and bet on a price rebound. It was only after the halt and after the resume and *after* these people sold what they though they had bought that NASDAQ decided to cancel the orders.

        Daytraders often buy on dips, betting that the stock is being oversold. This is a decent strategy, since often the reaction to bad news is more extreme than the news warrants. So, the stock dips suddenly, then regains a lot of what it lost. This is risky, because sometimes it turns out that news was even worse than initially reported, and the stock goes down even more. Daytraders understand this risk and accept it.

        However, NASDAQ has introduced an entirely unprecedented risk -- that your buy order may be cancelled with no notice after you have already sold it forcing you into a short position that you did not intend.

        Take this scenario:

        10:55 AM - Investor sees huge dip in stock, enters BUY order for 1000 shares

        10:56 AM - Investor gets confirmation from broker that he bought 1000 shares at $40, total price $40,000 (plus fees)

        10:58 AM - Stock is halted

        11:19 AM - Stock resumes trading, price starts going back up

        11:55 AM - Investor puts in SELL order for 1000 shares

        11:56 AM - Investor gets confirmation from broker that he sold his 1000 shares at $50, paying $50,000 (minus fees). That's a profit of $10,000.

        12:28 PM - NASDAQ announces cancellation of all trades between 10:46 and 10:58 AM.

        12:30 PM - Broker adjusts Investor's account to remove cancelled BUY order from 10:55 AM. But the SELL order was not in the cancelled time frame. Investor now has -1000 shares of stock and must buy to cover the debt.

        12:35 PM - Investor enters BUY order to cover the 11:30 SELL.

        12:36 PM - Investor gets confirmation from broker of BUY at $55 per share, total cost $55,000. Since the shares were sold at $50/share, that's a loss of $5000, due to NASDAQ's cancelling after the fact.

        If NASDAQ had announced it was cancelling transactions before resuming the stock, the investor would not have entered the SELL order in the first place, and the whole thing would have been a wash. That would be the fair way to handle it.

        • Re:Easy Fix (Score:3, Interesting)

          by LostCluster ( 625375 )
          Here's the problem with your timeline. At 11:19 AM, trading didn't restart at NASDAQ. It restarted at Archipelago. When trading re-started as NASDAQ, there was a simultanious warning that it was likely the pre-stoppage trades would be reversed.

          Sure, there was out of line behavior, but it happened at Archipelago... who is a completely different operation. The moral of the story is to trust NASDAQ for a fairly played market, and beware of Archipelago opening trading too soon on stocks that should remain halt
  • by stomv ( 80392 ) on Saturday December 06, 2003 @04:12PM (#7649768) Homepage
    and while the SEC and others do their best to proteect traders, mistakes do happen. This is part of the random process of the markets, and must be accounted for when making a trade, even on options markets.

    If you lost money, sorry. Unless the SEC/others can prove that somebody is liable for the initial mistaken order, you lose. Tough. Trading is risky, and sometimes the risks are completely unforseen.
    • by wizrd_nml ( 661928 ) on Saturday December 06, 2003 @04:21PM (#7649828) Homepage
      That's pure nonsense.

      The markets are meant for people to invest their money in businesses they feel will make a decent return for them. Investment risk consists of inherent risk of the industry, currency risk, political risk, etc. Nowhere in that equation is there EVER risk of a glitch in the computing system factored in.

      Mistakes happen because people are unethical, criminal, or just dumb managers. But mistakes should never ever happen because the system that you gave an order to buy or sell for you decided to have a glitch.

      Someone IS liable. NASDAQ is liable! NASDAQ is a company and it will be sued for the losses that it caused other people. It's as simple as that.

      • poppycock to your nonsense !

        you think they didnt think of this ??

        Disclaimer
        Because of the possibility of human and mechanical error as well as other factors, NASD and its affiliates are not responsible for any errors in or omissions from the information contained in or accessed through this Site. All such information is provided "as is" without warranty of any kind. NASD and its affiliates make no representations and disclaim all express, implied and statutory warranties of any kind to the user and/o
        • by mkldev ( 219128 ) on Saturday December 06, 2003 @07:39PM (#7650879) Homepage
          Rescinding sales after the fact may qualify as willful tortious misconduct. The requirement is that it must have been a direct action taken by NASDAQ (rescinding the stocks, in this case) with intent to harm a business (the day traders) rather than to promote its own purposes.

          If it can be shown that NASDAQ's systems caused this, rather than a glitch in someone else's systems, then their action was taken as an act of self-preservation, and would not be tortious. If it was caused by a problem on someone else's system, though, it probably would be.

          If, however, the failure was caused by NASDAQ's systems, the fact that safeguards were not put in place to detect such a runaway sell order qualifies as gross negligence on their part.

          Either way, if that were the contractual agreement between the day traders and NASDAQ, it seems likely that NASDAQ is screwed. However, the text you quote above is clearly web site boilerplate information, and has nothing to do with the contractual obligations NASDAQ has regarding an actual sale of stock. Without those contracts and a solid knowledge of contract law in the state of New York, we're all basically guessing here.

          That having been said, the odds do seem to lean in favor of NASDAQ being found to be negligent, and thus at fault, IMHO.

      • by LostCluster ( 625375 ) on Saturday December 06, 2003 @04:56PM (#7650029)
        Actually, Archipelago's the one to blame if you're gonna blame an exchange. Archipelago released the hold on the stock first, so most of the people who thought they were making an instant-profit by buying when it was low and selling minutes later turned out to be the instant losers. Archipelago's actions seemed to indicate the morning trades were going to stick. When the NASDAQ released their hold, they did so with a warning that anybody who had bought low in the morning should stand by because it was likely their trades were gonna be undone, and within the hour the NASDAQ followed through with the cancelations.

        So, sorry money hungry lawyers... you'll just have to settle for suing a .com-like stock market out of existance, NASDAQ's hands are clean...
        • How the hell can Archipelago be to blame? People wanted to buy and sell at specific prices - Archipelago enabled them to do it. If traders ignored the risk of exchange actions, that's their problem.

          Exchange/clearing interventions of various types have occured many times in the past (for example, the redefinition of futures contracts during the Hunt brother's Silver corner, the post-WWI coffee futures reset, the post-9/11 T+5 swap settlement change.)

          NASDAQ was the party making the exceptional change, n

      • by fermion ( 181285 ) on Saturday December 06, 2003 @05:22PM (#7650196) Homepage Journal
        The markets are meant for people to invest their money in businesses they feel will make a decent return for them. Investment risk consists of inherent risk of the industry, currency risk, political risk, etc. Nowhere in that equation is there EVER risk of a glitch in the computing system factored in.

        The investor chooses the risk and the reaction to short term changes. The low risk, long term investor would not likely be affected by this mistake. Such investors seldom keep track of minute to minute prices. Such an investor might notice something funny happened the previous day, and check on the details, but when nothing was found go on with life.

        It the high risk trader that is going to be burned by this scenario. This trader has chosen the high risk levels, and should know the consequences. And, your fantasy world notwithstanding, information is sometimes wrong. (In fact this case is not about computers but information dispersal) Sometimes you lose money. Sometimes you can sue for damages. But these traders are big boys and girl. The smart ones double check information if it seems out of the ordinary (and wrong quotes come by more than you might believe, often direcly from the exchange). They do not run home to mommy and daddy complaining that a 5th grader sold his pubes for $10, and you now want your money back.

        • by bagsc ( 254194 ) on Saturday December 06, 2003 @06:53PM (#7650657) Journal
          You're at least half right. But this isn't a question of information about prices - if it were, NASDAQ and the ECN would be off the hook. This is a question of whether the ECN executed orders that should not have been executed and NASDAQ didn't cancel them all. That's when risk minimizers are hit.

          If I market buy because the ticker says a $50 stock is selling at $40, it goes through between 10:46 and 10:58, then NASDAQ is right to cancel at 12:30: no problem. If my option straddle executes on the volatility on both sides, one before and one after 10:58, but NASDAQ cancels the options in-the-money (on Instinet) but not the options out-the-money (on another ECN), then its a problem. If I'm an idiot, and leave those options open unchecked through a halt, then its my fault for engaging in a risky behavior and getting slammed in the ensuing short-squeeze.

          Other stocks in the sector were off by 10%, so it was not stupidity to think that a 20% move was legitimate. NASDAQ halted Instinet, but not other ECNs. Archipeligo already announced intentions to file suit with the SEC on the matter. And that won't be the last suit filed on it.
    • How are you supposed to prepare for the risk that one side of a completed trade will be withdrawn? That's pretty impossible. Think about it: if you're trading in and out of a stock and one purchase or sale is removed, all your attempts to maximise your profits are turned into attempts to minimise your profits.

      It's like saying you just have to accept the risk of someone arbitrarily deciding to put a negative sign in front of your profit figure.
      • You should prepare for that risk the day you open your brokerage account, buy a seat on the exchange, etc. You have no more reason to expect a trade to be immediately good than you have a right to mow down slow pedestrians if you have a green light: a big set of (fairly common-sense) rules apply.

        Wall Street rewards non-diversifiable risk taking, and one of those risks is that trades will be disputed. Your average investor has many ways to mitigate that risk (dollar cost averaging, investing in mutual f

  • Bound to happen. (Score:5, Insightful)

    by dolo666 ( 195584 ) * on Saturday December 06, 2003 @04:13PM (#7649772) Journal
    This reminds me of a nugget.

    The stock market is frail, and a fool's playpen. I remember hearing a story about a huge media barron, before the stock market crash that led to the great depression. The mogul was standing in this elevator and overheard busboys talking about how they were going to start playing the stocks. The millionaire immediately sold everything when he got to the office. His reasoning was that if two people who had no money were playing stocks, that they were a sign that the whole system was at fault and doomed. I forget who this person was, so if anyone remembers... hehe feel free to say.

    The guy's logic is correct even to this day, imho. The big companies that go public hope that an infusion of cash will make them more profitable, but it usually ends up that they get to take a break on stockholder's money for a while until it's deadline time again and they have to scramble to make product/service X work.

    The whole system is wrong.

    Look at all the ads for investing these days. They all suggest that you trust them to make you money, and they have as selling points, how easy it is to make money. The easier it is, the more moot it is, imho.

    There is no easier way than hard work.

    Glitches are bound to happen. Remember when the grid went down this past summer? I would have suspected major losses then, but somehow it wasn't that bad?
    • by darkov ( 261309 ) on Saturday December 06, 2003 @04:56PM (#7650031)
      There is no easier way than hard work.

      I wonder how old you are, because you sound like my father.

      The fact is that there is no harder work than taking a risk. Things like the stock market allow people to take measured risks in return for a greater reward. It also provides cheap capital for businesses and liquidity in trading businesses. Without it the economy would be less efficient and your "hard work" would buy you a whole lot less.
    • by WryCoder ( 18961 )
      He got a tip from a shoeshine boy and figured that the last players were in the game and the market could only go down. He got out and preserved his fortune through the crash of 29.
    • Re:Bound to happen. (Score:5, Interesting)

      by Galvatron ( 115029 ) * on Saturday December 06, 2003 @05:04PM (#7650080)
      As someone else pointed out, this may be an urban legend; the version I'd heard of this involved shoeshine boys. The lesson to take away, however, is not "the whole system is wrong." The lesson is that all available sources of cash had been exhausted. The stock market will only rise so long as there are more buyers than sellers. The only way that happens is if there are people with cash that has not yet been invested in the market. During runaway bull markets, everyone wants in, so people sell bonds, cash out their savings accounts, etc. and dump it all in the stock market. Eventually, these sources of cash run dry, and the market crashes. The point of the original story is that if busboys are putting money in the market, then we're near the limit, there are no more new sources of cash for the market, and it's time for a crash.

      The same thing happened in the 90's. I read an article about how states which, during the great depression, had passed laws forbidding governmental organizations from putting money in the market were now repealing those prohibitions. Well, if Depression-era legal prohibitions were being repealed, then the market was due for a crash. Unfortuately, my prediction was a good two years eary, but oh well.

    • The guy was supposedly Joe(?) Kennedy - patriarch of the Kennedy family in the US. Not sure if "Joe" is the right name or not; "history of Kennedy" is a subject I skipped at school...
    • by the eric conspiracy ( 20178 ) on Saturday December 06, 2003 @05:27PM (#7650228)
      The stock market is frail, and a fool's playpen.

      Actually the stock market has been the best place to invest one's money over the last 70 years. No other investment actually outpaces inflation.

      Remember when the grid went down this past summer? I would have suspected major losses then, but somehow it wasn't that bad?

      When your predictions don't come true, it's time to re-evaluate your assumptions.

      Glitches are bound to happen.

      Yup. The question is what happens afterwards - do they get corrected and people move on, or do not get corrected and people lose confidence?

      The former seems to have happened here showing that the system has a degree of failure tolerance.

      Look at all the ads for investing these days. They all suggest that you trust them to make you money, and they have as selling points, how easy it is to make money. The easier it is, the more moot it is, imho.

      As you well know, advertisements and reality are two different things. Making money by investing it is hard work, requires intelligence, wisdom and perserverence. If you let yourself be driven by fads and ads, well you are one of the people PT Barnum was talking about.

    • Here [counterpunch.org] is an interesting, though left wing interview with Standard Schaefer on the ulterior motivies of the imminent plan by the Republicans to privatize social security and to use it to pump money in to Wall Street. It should be taken with a grain of salt but raises a lot of thought provoking questions about how the markets really work.

      Assuming the Republican's retain control of power next year its a near certainty they are going to make a first attempt at privitizing Social Security. The case for this w

    • Re:Bound to happen. (Score:4, Informative)

      by bagsc ( 254194 ) on Saturday December 06, 2003 @05:56PM (#7650379) Journal
      The big companies that go public hope that an infusion of cash will make them more profitable, but it usually ends up that they get to take a break on stockholder's money for a while until it's deadline time again and they have to scramble to make product/service X work.

      I've seen many types of correct critiques of the system, but this is just wrong. When a company receives money by issuing equity, they give up (through dilution of voting rights) partial control of the company. Management only authorizes stock issues when they expect to make money faster with the increased capital than their original equity could.
      An IPO or follow-on offering brings in money, but it doesn't make the issuer "rich." If those accelerated earnings don't materialize, the company will be worth just as much as it was worth before, only now the original owners have a smaller stake.

      Look at all the ads for investing these days. They all suggest that you trust them to make you money, and they have as selling points, how easy it is to make money.

      I challenge you to produce evidence of this. This is strictly illegal. Read up on securities law my friend, and you will notice that the regulations on investment advertising is pretty severe. If you promise someone to make them money and can't deliver, you are in violation of the law.
      The Securities Exchange Act of 1934 [uc.edu] set out the general provisions, and the National Association of Securities Dealers (NASD) Advertising Rules [nasdr.com] have strict guidlines on what constitutes violations regarding investment advertising.

      And even if somehow this ad got past the NASD, it wouldn't get past the SEC. If you learn anything about investing, learn that SEC Rule 10b-5 is your friend.
  • by 31415926535897 ( 702314 ) on Saturday December 06, 2003 @04:14PM (#7649776) Journal
    I work for a firm that writes software for options traders and clearing firms. Sometimes system glitches do happen (or more often than not, a user error, like entering in the wrong price). However, when this happens and a trade occurs, it sticks unless both parties agree to bust the trade.

    The fact that the trades were cancelled without permission from everybody involved in the trades is quite disturbing (because then it can set up precedence that any of your trades could be cancelled without you knowing about it, and that can really screw up your position).

    Some people lose money because of mistakes, and some people make money because of mistakes...that's part of how the market works, and you should be willing to accept that risk if you're going to trade.

    If it really was that bad (and a $20 difference is huge), and archipellago did screw up, they should take responsiblity and take the losses. If someone just entered in the wrong ask price, then that firm should take the responsibility. I know if our systems screw up our traders, then we mitigate those losses.

    I have a feeling there might be some lawsuits in the near future if there were a lot of shares traded.
    • by treat ( 84622 ) on Saturday December 06, 2003 @04:15PM (#7649781)
      The fact that the trades were cancelled without permission from everybody involved in the trades is quite disturbing (because then it can set up precedence that any of your trades could be cancelled without you knowing about it, and that can really screw up your position).

      That precedent is already there, for example NASDAQ's "clearly erroneous" rule.

      Really this happens all the time and I don't know why this particular incident made /.

      • by Gunzour ( 79584 ) <gunzourNO@SPAMgmail.com> on Saturday December 06, 2003 @05:08PM (#7650111) Homepage Journal
        It does not happen all the time. I believe this is the first time NASDAQ has ever cancelled trades *after* allowing a stock to resume trading. It is fundamentally unfair to allow a stock to be trading and then after the fact announce that some of those trades will be cancelled. That is why NASDAQ has the ability to halt a stock, and it should not have been resumed until after all decisions about cancelling trades were made and published.
        • by LostCluster ( 625375 ) on Saturday December 06, 2003 @05:18PM (#7650165)
          However, Archipelago was the first to make the decision to resume trading, so most of the people who got burned did so there. NASDAQ then was caught in a no-mans-land of decision making... their investigation hadn't yet returned an explanation, but Archipelago's actions indicated that they had already made a decision that the trades were going to stick. For a trading halt to be effective, there has to be a trading halt everywhere. The markets should have seperate regulatory divisions, but they all should be coming to the same decisons at about the same time. Archipelago clearly didn't do a good investigation here... that's the question that needs further investigation.
  • From the FA:
    Some exchange officials, speaking on condition of anonymity, said they had little sympathy for traders who bought stock at the low prices, and then lost money when they sold the stock before learning that the earlier trade was being canceled. "They should have known that was too good to be true," one said.

    Damn! Gotta check my Linux box for back doors, addware, or some other bug. I should have known it was too good to be true!
  • by mcrbids ( 148650 ) on Saturday December 06, 2003 @04:19PM (#7649807) Journal
    My first thought when reading the summary above was that this would be an easy problem if managed by a central, relational database system.

    Simply "roll back" the transaction that failed, and the dependencies would cancel themselves out. But, then I realized that the current RDBMS model only allows for a single transaction - you can't nest them.

    Also, transactions are private only - you cannot transact with data in the middle of another transaction.

    Thus, you might have ACID compliance, but only with one level of "undo".

    How hard would it be to create an RDBMS that supports infinite levels of "undo" or transaction/rollback.

    Such that you commit transaction A, which affects rows 1,2,3, and 11. Then, another transaction B which affects (further) rows 2, 3, and 12.

    Then, if you roll back transaction A, transaction B would be similarly affected. I dunno - the depencies may get rediculous - but it seems that this could and should be done at some point.

    Bright idea? Or another noise from an unpleasant orifice?

    Let me know what you think!
    • The problem is that there are many trading systems.

      You can't use two phase commit because it doesn't scale in the real world.

      This means that all trades would have to be conducted on a single system.
    • Even that is excessive. Tag each table entry with a timestamp, and never issue deletes or updates -- just a new insert which either declares an old value to be considered deleted or changed. Want to roll back to $GIVEN_DATE? Just delete everything added since that time.

      That said, this wouldn't be practical in this case, just because the amount of rearchitecting that would be needed to implement it.
    • by Fnkmaster ( 89084 ) * on Saturday December 06, 2003 @04:48PM (#7649986)
      Well, the first problem is that all trades are pretty much temporally dependent for a given instrument. So you basically have to back out all the bad trades made after a point in time. Which is essentially what was done in this case - the trades *were* all cancelled. Keeping a real transaction open would be prohibitive and silly, since you want to design a system where these kinds of fuckups are very rare and manual.


      Unfortunately, people don't seem to understand the real problem here. The problem is that people make offsetting trades in other markets, that are built on other systems, to lock in profits in the primary market. This story was about traders who sold options contracts to lock in profits on the stock itself. The trades on the stocks were busted by NASDAQ, but the options trades can't be backed out of, they are in a separate market. Thus the trader gets fucked. Having a transactional rollback capability on the NASDAQ wouldn't help here, it would have to encompass all the other markets people might trade in.


      Mind you, I would think there would be legal recourse here based on contract law. The buyer entered into an option sale contract with reasonable reliance on the NASDAQ's "promise" that they bought the stock at a low price. Promissory estoppel against the NASDAQ, or against Archipelago? I don't know, sounds to me like an interexchange issue that needs legal or regulatory collaboration more than it needs a technical solution.

    • a) rdbms theory does not preclude nested transactions. in fact, CJ Date & H Darwen seem to rather think it should be part of the the requirement for a rdbms. current products don't all support nested transactions, but some do.

      b) you don't want this anyway. a trade is a contract, and like contracts usually are, undoable only if both parties agree to do so. in the case of trades like these, with a domino effect, the top-level traders who want to undo their trade (or at least one side does) need to ask th
    • The only other issue is the "second-order" effects... i.e. I saw this "deal" so I sold another stock at an sub-optimal position to get in on the "deal" now that stock has changed positon and I want it back...

      Frankly, they should heavily penilize the errant broker...perhaps 1 month inelligibility to trade...and make the "day traders" live with their choices. Day Trading is a questionable, but legal practice anyway...like french fries & soda pop, too much will wreck the market...perhaps a few incidents

  • by A non moose cow ( 610391 ) <slashdot@rilo.org> on Saturday December 06, 2003 @04:20PM (#7649817) Journal
    "There does not seem to be any way to gracefully undo such errors"

    They wouldn't have to be gracefully undone, if there was a simple check to gracefully prevent them from being made.
    • There's no way to tell that the first errant transaction is in fact errant. The market computer systems don't comprehend business news... a stock deserves to crash if bad news about that company's future has just come out. If that was in fact the case, those trades would have been perfectly valid.

      Computers can't understand business news, so it's always going to take human spotters to notice a stock that is moving despite the lack of apparent news. Those humans need time to act, and that's why they buy time
  • A computer system gone amok combined with intensely competitive stock markets and indecision by Nasdaq officials to create wild trading in a single stock yesterday. As a result, some traders were left with big losses even though they had bought low and sold high.

    Wow sounds intense. The corrections will be made eventually, but the way the heading sounded, I didn't know whether I should be ducking for cover in a nuclear fallout shelter or something.

  • by RealProgrammer ( 723725 ) on Saturday December 06, 2003 @04:25PM (#7649847) Homepage Journal
    The problem appears to have begun with an order to sell that was entered into a system that Gr8Trade, a subsidiary of Instinet Group, leases to brokerage firms. The system allows a firm's customers to enter their orders directly into the system, and sends them to markets for execution.

    W3 R Gr8Trades. All U base R belong to us. Nyaaaaa.

    (Anyone entrusting a company named "Gr8Trades" to buy 5000 shares at $40/share should be spanked. $200,000 was theirs, now it's not.)


  • Clearly the world's financial markets need a rollback mechanism. Literature abounds with tales of chaos that would ensue because of a set of erroneous or malignant trades rippling through the economy.
  • This sounds like a typical case of user error.

    I'd say the program might need a little revamping, or the user who entered the wrong price should take the fall.
  • by LostCluster ( 625375 ) on Saturday December 06, 2003 @04:30PM (#7649883)
    I think the people left holding the bag here are exactly the right ones: The ones who thought they were gonna make instant big profits.

    Not only did think they had bought something something at far below its value, they then signed options contracts to sell what they had just bought at slightly below its regular price. They should have known something was fishy... why would anybody want to pay close to the normal price to them if the price had just plumeted? Why would anybody want to sell to them at far below the usual price?

    The should have known that the rules of the game allowed for their trade to be undone, yet they committed to an options contract that couldn't be undone because if they had hesitated, they risked their "instant profits" going away... their fault.
    • Do you know what the market is going to do at any given month, how about any given week? Day? Hour? Minute? The market is set up under the principle that transactions are executed immediately and without prejudice. If the stock price goes down $2, who is to say that is wrong? You? Stock prices can go down drastically in a few hours, does anybody sit there deciding that they know the reason why it went down? Hell no, someone puts in a order to buy ABC at 40, and that is it. If the someone sells at 40 the t

  • bah, a miniscule amount of money involved in a minor glitch in a 3rd party system putting in an erroneous price that the NASDAQ successfully detected & stopped.....this has nothing to do with how "fragile" the stock market systems are. Move along, nothing to see here.
  • by DrunkenTerror ( 561616 ) on Saturday December 06, 2003 @04:32PM (#7649897) Homepage Journal
    /. write up:

    There does not seem to be any way to gracefully undo such errors.

    From the article:

    Such losses would have been prevented if the markets had not resumed trading until a decision was made on which trades, if any, should be canceled. But with markets intensely competitive, trading resumed before officials had made their decisions. The losers were traders who were not responsible for the errors or the slow decision making.

    But I guess hindsight is 20-20, right?
  • by TheSHAD0W ( 258774 ) on Saturday December 06, 2003 @04:44PM (#7649964) Homepage
    How can I have confidence in a stock market where trades can be suddenly reversed if someone cries, "but it was a mistake!" That's like my buying a car and while driving out of the lot someone jumps in front of me and demands an extra $5,000 because they made a mistake. Sorry, I've got my receipt, the car is mine buddy.
  • by ptomblin ( 1378 ) <ptomblin@xcski.com> on Saturday December 06, 2003 @04:45PM (#7649970) Homepage Journal
    It was unusual to see the spread between buy and sell markets be more than a few cents. And with the software that let you see the position on NASDAQ and all the other order books simultaneously, that spread was getting even smaller.

    So I find it puzzling that traders wouldn't realize something was amiss with a $20 spread on a stock. I'm sure they did realize it was amiss, and there was a strong possibility that NASDAQ would break the trade, but they figured they'd go ahead with the trade just in case they could make some money before it was broken. It was, they lost money, and now they're crying.

    BTW: Somebody asked what NASDAQ's software runs on. Mostly they use Suns, although there are some Windows systems, and possibly some SGIs.
  • Insurance (Score:3, Insightful)

    by squashed ( 664265 ) on Saturday December 06, 2003 @04:47PM (#7649980)
    Graceful way to undo? Of course not. However, it's not to say that a financial market could not operate with these types of glitches anticipated in the system. For example, there could be introduced explicit insurance against the risk of such infrastructure failures. Notably, large players -- typically making the most sweeping "hedging" buys of the kind described here -- would not buy such an insurance product. Instead, they would self-insure, adopting internal practices that would factor in the risk of infrastructure failure, and spread the risk across all its operations. In other words, in the absence of explicit insurance, it's just another example of games that only large institutions should play. In fact, it is often neither advisable nor desirable to make markets "safe" for small players. It's just too expensive, in terms of additional overhead and lost market efficiencies.
  • by LostCluster ( 625375 ) on Saturday December 06, 2003 @04:50PM (#7650002)
    The system actually seemed to have worked pretty well except for the actions of th Archipelago market. There's no way to prevent errant data from making its way to the financial markets, so the question is what are you gonna do about it once it gets there?

    What's supposed to happen is that everyone is supposed to stop trade in the stock while market officials try to sort out what happened. The NASDAQ did just that, and called the company involved to see if they had any news that would have justified the drop and they responded that there was no news. NASDAQ announced that their initial review indicated that there was errant trading going on, reserved the right to cancel the trades made before the halt, and released the stop. Within the hour, they confirmed the source of the problem, and revesed the errant trades.

    Yet, while trading was still halted on NASDAQ, Archipelago undid their halt without any announcement that anything was wrong. This is wrong on two levels... not only did it falsely convince other people that the drop was for real, but it also pressured NASDAQ's decision-makers to hurry up, otherwise NASDAQ would lose trading volume to Archipelago.

    So, the blame for this mess really belongs at Archipelago... they seem to have done an investigation that resulted in a verdict of no error, where in 20/20 hindsight we know there was an error on the play. Did Archipelago conduct a flawed investigation, or did they conduct any investigation at all? This was a case of the market's self-policing rules falling apart rather than any computer program...
  • by vandelais ( 164490 ) on Saturday December 06, 2003 @08:12PM (#7651021)
    On Oct 2 2002, someone at a brokerage firm Bear Stearns entered a 4 million dollar trade as a 4 billion dollar trade and it wasn't doublechecked and caused most market indices do go down about a half percent DURING NORMAL TRADING HOURS during the last hour of trading.

    This was widely reported in the financial press, and eventually the sell position was unwound.

    Since the order was a sell order tied to a diversified holding, it caused this decline to happen with both the electronic Nasdaq exchange and also the auction-based NYSE.

    "In October of last year, for example, a trader at Bear Stearns mistakenly entered an order to sell $4 billion in stocks instead of $4 million. And two years ago London's stock market collapsed after one hapless trader entered an extra zero into a sell order."

    See

    http://stacks.msnbc.com/news/945909.asp?0sl=-21& cp 1=1

    and

    http://news.bbc.co.uk/1/hi/business/2294525.stm

    for more details

    Previous errors

    Mistakes have been made in market trading before by other companies.

    In May last year, London's FTSE 100 index dropped by more than 2%, after a trader typed 300m, instead of 30m, while selling a parcel of shares.

    In 1998 a Salomon Brothers trader mistakenly sold 850m-worth of French government bonds by LEANING ON HIS KEYBOARD.

    And at the end of 2001, shares in Exodus, a bankrupt internet firm, jumped by 59,000% when a trader accidentally bid $100 for its shares, at a time when its value was 17 cents.
    • by mabhatter654 ( 561290 ) on Saturday December 06, 2003 @09:13PM (#7651314)
      ...is for buyers and sellers to all SLOW DOWN and pay attention to long term performance rather than minute-by-minute numbers which aren't real meaningful statistics anyway. Frankly anything outside the offical quarterly reports is speculation anyway! Simply allowing only 1 trade per 24 hour period per stock would fix many, many issues with the market right now. The "day traders" should be restricted to playing "numbers" with Magic:TG cards and Ty Beanie Babies....rather than mucking with our financial backbone.
      • Nope. That is absolutely the worst thing you could do to a market. The day traders actually REMOVE risk from the market. If it wasn't for them liquidity would drop and the market would become less efficient.

        Have you noticed that spreads keep on getting smaller? Think for a minute about why that happens...

  • by anthony_dipierro ( 543308 ) on Saturday December 06, 2003 @08:24PM (#7651067) Journal

    He saw an ad for really cheap DVDs at some discount web site. So he ordered a bunch of copies and then sold them on eBay. Only problem is he didn't wait until the DVDs actually arrived before he sold them, and it turned out they were out of stock, and the order was cancelled. So he had to buy the DVDs at a higher price somewhere else in order to fulfill his eBay sales. Oops.

  • by Lawrence_Bird ( 67278 ) on Saturday December 06, 2003 @11:17PM (#7651807) Homepage
    1) Anybody who bought at those low prices knew something was
    either a) very wrong or b) very bad news was out. This was
    after all a $60 stock and they were now buying at $42.
    Without going into detail, I find it impossible they lost
    any money on options trades (no open exchange, prices were
    much higher when they did reopen).

    2) Similar things have happend at CBOT and CME on their
    electronic stock index products a few times this past year.
    Most recently, a trader was said to have entered a stop/loss
    order in the less liquid Dow Jones futures for a very large
    amount. As CBOT handles S/L orders natively (internally),
    their system proceded to hit bids until the order was
    filled. Those trading S&P futuers did notice what was going
    on and started selling there as well, perhaps fearing a
    terrorist or other news related item. The sell off was not
    as far (500 Dow pts), in part because of the greater market
    depth, and the fact nobody could figure out what was going
    on. Trades were subsequently broken, hours later, on the
    CBOT, but NONE were cancelled on the CME. This caused quite
    a bit of pain for people who had s/l orders open which were
    executed, for all intents erroneously. (no not me, but I do
    know one who was). CME refused to cancel as the original
    event did not occur in house.

    To this day, I do not believe the order was entered in
    error. I believe a hedge fund or other firm had a need to
    buy, and buy large. What better way to get filled then to
    trigger a large move in a closely correlated market (Dow
    futures) where you know the majority of the trades will be
    cancelled, and just sit on the bid in the other market
    (CME) as people panic sell. And do not rule out collusion.

  • by Orne ( 144925 ) on Sunday December 07, 2003 @12:50AM (#7652115) Homepage
    I caught the various news reports on CNBC on friday evening... apparently NASDAQ is only allowed to halt a stock when they are under investigation for regulation violations. When NASDAQ froze it, they also asked the west coast & overseas markets to halt trading on the ticker, but there was no precedent for this; NASDAQ just broke procedure. The interviewees seemed really pissed.

    From the article, it appears that the software that communicated market orders went into a loop, and submitted a loop of Sell orders on this one stock. If it were just little old me selling stocks I don't own, it's called a Short, and I'd be liable for buying back any shares I don't own. If its really a computer error, then its up to the market providers to cancel the orders.

    At some point, the SEC needs to find out who was liable this this little adventure. Why does NASDAQ allow companies to submit raw sell commands w/out proofing them for validity? And what about this software company? If it were me playing with Ameritrade, and their software repeats my order 100 times, shouldn't the software company be liable for all of the (unsolicited) trades? If these trades should have been cancelled, why did some markets resume trading before they validated the orders? I wouldn't be surprised if there's another round of market rules that fall out of this, because obviously there's a big loophole here.

One person's error is another person's data.

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