NYSE Tech Delays Contributed to the May 6 Flash Crash

the investor trade magazine ai5000 and its editor at large, Joe Flood, author of The Fires: How a Computer Formula, Big Ideas, and the Best of Intentions Burned Down New York City-and Determined the Future of Cities. Here, we excerpt Flood's latest reporting on the May 6 Flash Crash, which contains the New York Stock Exchange's first public admission that big board's electronic system fell behind the market. The delays appear to have exacerbated a mini-crisis that resulted in a 1,000 point drop in the Dow Jones Industrial Average in just a few minutes.

There were mechanical delays in the reporting and printing of the prices that stocks traded, with some delays lasting as long five minutes on some alternative exchanges. After 15 or 20 minutes the alternative exchanges caught up, but the NYSE's printed prices lagged behind NASDAQ and alternative exchanges like BATS. According to the market research firm Nanex, these delays were as long as 24 seconds, enough time to wreak havoc with the National Best Bid Offer system, which legally requires brokers to take the highest bids and lowest offers for their clients.

For the first time in public, today the NYSE officially confirmed to me what the leaked research and Nanex reports say: that there were significant reporting delays from the world's largest stock exchange. "Because of the incredibly high volume that day, there were delays in the reporting on a number of stocks," said NYSE spokesman Ray Pollecchia. "We were in the process of updating our programs, and some areas that hadn't yet been updated," were unable to handle the increased load.  


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Here things get interesting, but fairly complicated, so bear with me. This lag meant that there were bids on the NYSE that were higher than the lowest offer prices on other exchanges, and offers that were lower than the highest bids on other exchanges. In Nanex's formulation, the lag occurred because the NYSE  bids and offers weren't being time stamped when they were made, but after they got in line behind other quotes and were processed by the NYSE servers, and by the time that whole process was finished and the time stamps applied, the actual prices  had already moved on. It wouldn't be the first time this has happened, but May 6th was no ordinary trading day, and along with the Apple and ETF pricing problems and reporting lags on other exchanges, further tightened an already downward spiral.

According to Nanex's Donovan, the delays may have been the primary cause of the nearly 1000 point crash that occurred in just minutes. "The market was already down a few hundred points for the day, before the delays," says Nanex's Jeff Donovan. "You just line up the times, and when the [NYSE] lag happen is when the market really crashes."   

The delayed reporting meant that different exchanges were giving different prices for the same stocks (see the charts here). In instances where bids appeared to be higher and offers appeared lower on the NYSE than other exchanges, all of the business would have been routed to the NYSE. The problem was that those lower offers and higher bids on the NYSE didn't actually exist anymore--they existed 15 seconds ago (cue: Back to the Future theme music)--so the NYSE was further backlogged by a bunch of trades that couldn't be executed. Users with access to direct quote services like the NYSE's Openbook, on the other hand, would have been able to see the realtime quotes--not the delayed ones--and been able to spot the discrepancy. According to the NYSE's Pollecchia, this probably stopped most traders from trying to execute the trades. According to Nanex, its possible some firms could have used this delay to make money.

Read the rest of the story at ai5000.

Editor's note: As part of our continuing coverage of algorithmic and high-frequency trading, we've been collaborating with