Reprinted from Securities Industry News; FYI
"ETG, a New York City-based introducing broker that bought the account of Instinet subsidiary ProTrader Securities in June, said it was not involved in erratic trading in Corinthian Colleges stock last Friday.
Instinet, which had retained the technology unit of ProTrader and renamed it gr8trade, identified the firm involved in the problem as a user of gr8trade's risk management software. Instinet, majority-owned by Reuters, also said the firm's correspondent broker is a member of Instinet Clearing, another of its units.
"ETG flatly and unequivocally denies that it had any part in the [Corinthian] trading disaster," ETG said in a statement issued today.
Securities Industry News on Tuesday quoted industry sources as saying ETG was involved in the trades that prompted a 32-percent drop in Corinthian stock over 12 minutes. ETG did not return calls on Tuesday.
The sources mentioned the old ProTrader and were actually referring to gr8trade, whose services include a risk management system that warns traders of their exposure but does not generate trades.
"ETG submits that, like other traders and investors, it was materially harmed by the [Corinthian] fiasco. ETG bought shares during the 12 minutes before the trading halt and sold them shortly thereafter at a profit. As a result of the decision by Nasdaq, Arca and Instinet to break all trades in that 12-minute window, ETG was forced to cover its artificially created short position at inflated prices," ETG also said. "ETG is evaluating all legal options including actions against Nasdaq, Arca, Instinet and/or other participants."
The generation of about 3,750 trades in Corinthian between 10:46 and 10:58 a.m. (EST) last Friday may be the result of human--not computer--error, which would further fuel the debate about whether a Nasdaq trading halt and subsequent trade cancellations were warranted.
ArcaEx did not agree that circumstances warranted a market-wide regulatory halt and resumed trading while Nasdaq was canceling the earlier trades, which resulted in some traders suffering losses. A group of traders at DL Capital Group is already suing Nasdaq for alleged losses incurred during the trade cancellation.
Nasdaq explained its reasons for the trade cancellation in a Dec. 8 letter to the Securities and Exchange Commission, and the Pacific Exchange, ArcaEx's self-regulatory organization (SRO), also sent a report to the SEC on Wednesday.
In its letter, Nasdaq said that at 10:55 a.m., "NASD Member A contacts MarketWatch and states that price decline stems from malfunction in another NASD Member B order-routing system, resulting in thousands of orders flooding into the marketplace."
The report from Member A led Nasdaq to halt trading in Corinthian at 10:58 a.m. Other Nasdaq trading venues halted trading as well, until ArcaEx contacted Nasdaq at 11:15 a.m. to clarify the reason for the halt. Because ArcaEx disagreed that the stoppage qualified as a regulatory halt, it resumed trading before Nasdaq.
"Clearing firm [Instinet Clearing] for Member A contacts MarketWatch to further explain system problems at Member A and B. Member A set a loss limit of $0 in Member B's risk management system," Nasdaq reported to the SEC. "As a result, the loss-limit system created orders to liquidate the total position. The firms' positions became short and the system sent orders to cover, but the resulting cover created additional orders to liquidate. This cycle of buys and sells created thousands of orders and the system was unstoppable."
According to an industry source, the user of the gr8trade software might have thought that, in order to prevent a trader from taking any risk, it had to set the loss limit at $0. But if a stock inventory still existed for that trading position, the risk management system would sell all shares to bring the exposure to zero.
If the zero-loss position included "shorts" or stocks the broker did not own at the time but intended to buy at a later stage, as soon as the inventory was decremented to zero, it created the need to buy those shares, thus prompting another round of trades.
Clients of Instinet often try to leverage technology to their advantage, including with programs seeking to lock markets--or match bids and offers--to pocket liquidity rebates."
FYI -
eurextrdr
"ETG, a New York City-based introducing broker that bought the account of Instinet subsidiary ProTrader Securities in June, said it was not involved in erratic trading in Corinthian Colleges stock last Friday.
Instinet, which had retained the technology unit of ProTrader and renamed it gr8trade, identified the firm involved in the problem as a user of gr8trade's risk management software. Instinet, majority-owned by Reuters, also said the firm's correspondent broker is a member of Instinet Clearing, another of its units.
"ETG flatly and unequivocally denies that it had any part in the [Corinthian] trading disaster," ETG said in a statement issued today.
Securities Industry News on Tuesday quoted industry sources as saying ETG was involved in the trades that prompted a 32-percent drop in Corinthian stock over 12 minutes. ETG did not return calls on Tuesday.
The sources mentioned the old ProTrader and were actually referring to gr8trade, whose services include a risk management system that warns traders of their exposure but does not generate trades.
"ETG submits that, like other traders and investors, it was materially harmed by the [Corinthian] fiasco. ETG bought shares during the 12 minutes before the trading halt and sold them shortly thereafter at a profit. As a result of the decision by Nasdaq, Arca and Instinet to break all trades in that 12-minute window, ETG was forced to cover its artificially created short position at inflated prices," ETG also said. "ETG is evaluating all legal options including actions against Nasdaq, Arca, Instinet and/or other participants."
The generation of about 3,750 trades in Corinthian between 10:46 and 10:58 a.m. (EST) last Friday may be the result of human--not computer--error, which would further fuel the debate about whether a Nasdaq trading halt and subsequent trade cancellations were warranted.
ArcaEx did not agree that circumstances warranted a market-wide regulatory halt and resumed trading while Nasdaq was canceling the earlier trades, which resulted in some traders suffering losses. A group of traders at DL Capital Group is already suing Nasdaq for alleged losses incurred during the trade cancellation.
Nasdaq explained its reasons for the trade cancellation in a Dec. 8 letter to the Securities and Exchange Commission, and the Pacific Exchange, ArcaEx's self-regulatory organization (SRO), also sent a report to the SEC on Wednesday.
In its letter, Nasdaq said that at 10:55 a.m., "NASD Member A contacts MarketWatch and states that price decline stems from malfunction in another NASD Member B order-routing system, resulting in thousands of orders flooding into the marketplace."
The report from Member A led Nasdaq to halt trading in Corinthian at 10:58 a.m. Other Nasdaq trading venues halted trading as well, until ArcaEx contacted Nasdaq at 11:15 a.m. to clarify the reason for the halt. Because ArcaEx disagreed that the stoppage qualified as a regulatory halt, it resumed trading before Nasdaq.
"Clearing firm [Instinet Clearing] for Member A contacts MarketWatch to further explain system problems at Member A and B. Member A set a loss limit of $0 in Member B's risk management system," Nasdaq reported to the SEC. "As a result, the loss-limit system created orders to liquidate the total position. The firms' positions became short and the system sent orders to cover, but the resulting cover created additional orders to liquidate. This cycle of buys and sells created thousands of orders and the system was unstoppable."
According to an industry source, the user of the gr8trade software might have thought that, in order to prevent a trader from taking any risk, it had to set the loss limit at $0. But if a stock inventory still existed for that trading position, the risk management system would sell all shares to bring the exposure to zero.
If the zero-loss position included "shorts" or stocks the broker did not own at the time but intended to buy at a later stage, as soon as the inventory was decremented to zero, it created the need to buy those shares, thus prompting another round of trades.
Clients of Instinet often try to leverage technology to their advantage, including with programs seeking to lock markets--or match bids and offers--to pocket liquidity rebates."
FYI -
eurextrdr
