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5 of the Most Catastrophic Computer Glitches in Recent History

NASDAQ Facebook IPO

Facebook was sashaying down the runway of its debut on the public scene on May 18, 2012, when multiple computer programming glitches caused the NASDAQ to fall flat on its face. Facebook stock barely closed the day above $38 per share, the amount it broke at that morning.

The event was nothing short of a watershed moment for the NASDAQ. Facebook going public was the second largest initial public offering seen in the United States and the biggest parlayed by NASDAQ.

But a delay in executing trades and frozen traders’ monitors on the trading floor devolved into communication chaos. This left trading stymied until late in the afternoon, according to a New York Times article. Had stocks been bought? Had they been sold? Traders had no clue.

At the end of the day, Facebook stock—it had seen spikes and tumbles throughout the day—ended valued just above what it had started the day at. Some in the financial sector blamed the disappointing end of the first day of the social media mogul’s public trading on uncertainty in the trading arena. With traders and investors unsure if NASDAQ had executed their purchases and trades, dealing in Facebook stock may have seemed like a precarious option on day one, according to a Reuters article.

Others claim that NASDAQ knew its systems, which were already bruised, would be knocked out by the Facebook IPO. This may have led to a loss of hundreds of thousands of dollars and traders could not confirm their trades, according to an article on theatlantic.com.

When prices of Facebook stock plummeted—later reports would confirm the technology giant’s shares dropped below its start price to $32 a piece—investors clambered to sell the losing shares. But that’s what everyone else was doing too, and many traders ended the day with losses, the article stated.

Talks between NASDAQ and the Securities and Exchange Commission have resulted in a possible $5 million fine for NASDAQ. The exchange had previously offered a $62 million settlement with firms who lost money due to the glitch, but the offer was not received well by all parties, according to an article on thompsonreuters.com.

August 2012 Knight Capital Group Glitch

Ranking as perhaps the costliest computer “whoops” ever, the massive financial losses spawned by a programming glitch by Knight Capital Group cost the firm $440 million and left it on the brink of bankruptcy.

Knight Group’s computers were supposed to roll out multiple automatic orders over several days. Instead, the computers signaled their programs to make all the changes on one day, resulting in a massive amount of shares being bought and sold immediately. Specifically, 150 stocks listed on the New York Stock Exchange were traded at the speed of sound.

Some observers likened the Knight Group glitch to a “fat finger” error, where a typist inadvertently depresses multiple or errant keys, according to a Chicago Tribune article about the event. Investors lost about $10 million per minute, which threatened the New Jersey-based firm with a death knell to the tune of the NYSE opening bell.

In basic terms, the firm’s computers sold stocks so fast that the value of many stocks was boosted. Knight Group lost millions of dollars when it had to sell those stocks back at a lower price, a New York Times article explained.

The company had recently employed new software to enhance its lightening-speed trading. The program short-circuited, but Knight said none of its clients had been financially wounded by the glitch.

But the computer error did affect Knight’s employees. Earlier this year, five percent of them were laid off as part of the firm’s reorganization after it was purchased by Getco Holding, Co.

Tokyo Stock Exchange glitch of 2012

Computer programming glitches are not an American-only phenomenon when it comes to their profound impact on the financial sector. In early 2012, safeguards failed to execute their commands, resulting in the stoppage of trading in 241 securities on the Tokyo Stock Exchange.

The miscommunication happened on one of the TSE’s servers used to send order information to investors, according to a Bloomberg article. Trading in these specific securities was also halted on the Sapporo Stock Exchange, SBI Japannext and Chi-X Japan Ltd.

One of the greatest effects of this Tokyo Stock Exchange glitch was failure of Sony stocks to spike after the company changed helmsmen. The day before the system failure, Sony had announced that it was replacing its then chief executive officer.

The TSE estimated that the monetary loss attributable to the glitch was $640 million, a Financial Times article stated. The exchange slashed its president’s salary by 30 percent for one month, and that of three other head honchos by 20 percent, the article stated.

Later on in 2012, another programming glitch brought derivatives trading to a screeching halt for more than an hour, a Reuters article stated. This hiccup was due to a failure in the TSE’s backup systems, one that affected trading at the bourse, a different system than was guilty in the initial 2012 glitch, according to a Zdnet.com article.

Following the second glitch, financial regulators in Japan sanctioned the Tokyo Stock Exchange and the TSE hired outside consultants to scrutinize their methods. It also cut the salaries of its top four executives by 30 percent for a couple months, according to the Wall Street Journal.

Another part of the resolution to this TSE glitch was to employ a modified version of the failed program after verification in a test environment, a techwell.com article reported at the time.

May 2010 Stock Market Crash

Also called the Flash Crash, this event caused the Dow Jones Industrial Average to drop by about 1,000 points. The Dow rebounded moments later, but not after some of the finance community’s greatest fears about technology-assisted trading had been realized.

Investors and traders had been spooked by something called high-frequency trading, which uses supercomputers to make quick trade deals at lightning speed and doing so without a driver behind the wheel. This type of drive-through trading was intended to lower the cost of doing business in the stock market world, according to an article printed at www.time.com. There were concerns before the May 2010 crash, and the Securities and Exchange Commission was soliciting input from those using the HFT method.

Circuit breakers were in place to halt the market when things go awry, but in the case of the May 2010 situation, shutting down the New York Stock Exchange only compounded matters. When the exchange halted trading, investors lost access to 40 percent of trading volume, which, instead of preventing further chaos—this would have been a viable option had the NYSE then retained its nearly 100 percent volume holding as it did in the 1980s and 1990s—it led to a herky-jerky chaos, the article states.

Unlike human economists, computers cannot liquidate shares when a stock takes a nosedive. In order to have a limit of spread between what a stock is bought for and then sold at, a measure which could help soothe the market in the event of a tumble, the article states.

Later findings blamed the crash on faulty computer algorithms, which sold $4.1 billion worth of E-Mini Standard & Poor’s 500 futures contracts within 20 minutes. These were intended to be sold over five hours. The stop gaps that reversed the trend on May 6, 2010 were also computer-generated, a report on consumerist.com states.

The fallout of the crash has been the use of stock-specific circuit breakers, clamping the trading on a stock if its prices change by 10 percent or more over a five-minute period, the article states.

Black Monday of 1987

This devastating date marked the end of the golden eighties decade in America. While not due to a programming error, the stock market plunge has been linked to poor programming planning. Though, program trading has been cited as one of the culprits. Program trading is done by a computer, executing trades very quickly based on extrinsic factors, such as a market decline. Speaking generally, this stock market crash was precipitated by bickering about exchange rates and lack of understanding the precarious science of market pathology. The Dow Jones Industrial Average sank by 508 points, which equaled at that time 22.6 percent of its value. The Standard and Poor’s 500 lost 20.4 percent. It was the worst loss day Wall Street has ever seen. Observers were starting to cry Great Depression redux, according to computerworld.com.

In the midst of giant tumbles in market numbers, computers, which had been programmed to protect against compounded losses, went hay wire trying to insure portfolios. Once stocks began to plummet, programs felt the loss and signaled further sale of stocks. This process is called program trading and it works similarly to a pre-programmable home thermostat. Computers automatically buy and sell stocks based on algorithms set by stock trading companies. When the temper of a market changes, these computer programs react according a set of mathematical equations. But on Oct. 19, 1987, a well-intentioned exit strategy turned into a log jam with too many sales, a Wall Street Journal article explained.

Black Monday happened after companies went on a spree of mergers, acquisitions and extreme growth through junk bonds and the familiarity of Initial Public Offerings. The market crash cost some investors millions of dollars and led to outrage sometimes culminating in shooting rampages and the death of some stock brokers who were thought to be responsible for losses, according to stock-market-crash.net.

Investors and traders learned well from the Black Monday event. Within several years, the markets were soaring. Methods similar to portfolio insurance are used today, but with strategies to offset a mass exodus from the market as seen in 1987, the Journal article stated.

 

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