What hit the market?

By Allan Chernoff, CNN Sr. Correspondent


NEW YORK (CNN) -- New York Stock Exchange efforts to stabilize Thursday's stock market had the opposite effect, triggering a momentary market collapse.

It wasn't a goof. It wasn't human error. Rather, it was an instant that displayed the hazard of new markets that handle billions of dollars' worth of trades each day.

During yesterday's fast-moving midday market, NYSE specialists -- who oversee trading in individual stocks -- used their authority to call a momentary time out. The idea was to bring together buyers and sellers, and get their prices more in line with each other.

It happened in five Dow stocks, including 3M (MMM, Fortune 500) and Procter & Gamble (PG, Fortune 500), according to the NYSE, and in a good number of the listed stocks. The NYSE did not have a tally of exactly how many.

Years ago, when the NYSE dominated trading, such "time-outs" worked well at stabilizing stock prices.

But today, the NYSE accounts for only about 25% of the volume in its listed stocks. Much of the rest comes from computerized markets run by private companies -- and some of those systems did not take a time out yesterday.

"The rest of the markets are free to trade around us," said NYSE CEO Duncan Neiderauer, "and that's what they did."

So, as the NYSE paused for a minute or two at about 2:40 p.m. ET, the off-exchange computers kept searching to execute trades. They hit the best bids still standing, which in many cases were far below the prior price.

And in some cases, the off-exchange computers found no bids at all. When that happens, market-making computers see a zero bid, then offer a penny higher to capture the trade and collect a commission -- hence the trades of just one cent for several stocks, including Accenture (ACN), Boston Beer (SAM), Exelon (EXC, Fortune 500).

"Computers are looking for the best bids. The real best bids shut themselves down," one trader told CNNMoney.com.

"You had penny prints. The bid was zero. The algorithms were designed to penny the bids," said another trader.

The NYSE argues Thursday's sudden plunge shows its model is best suited to maximize market stability.

"Yesterday's experience clearly demonstrates the value of retaining an element of human judgment in the market," said NYSE spokesperson Ray Pellecchia.

But the role of human judgment has been rapidly diminishing in the securities marketplace, placing individual investors at risk of such an instant market meltdown happening again. To top of page

Frontline troops push for solar energy
The U.S. Marines are testing renewable energy technologies like solar to reduce costs and casualties associated with fossil fuels. Play
25 Best Places to find rich singles
Looking for Mr. or Ms. Moneybags? Hunt down the perfect mate in these wealthy cities, which are brimming with unattached professionals. More
Fun festivals: Twins to mustard to pirates!
You'll see double in Twinsburg, Ohio, and Ketchup lovers should beware in Middleton, WI. Here's some of the best and strangest town festivals. Play
Overnight Avg Rate Latest Change Last Week
30 yr fixed3.79%3.84%
15 yr fixed2.90%2.95%
5/1 ARM3.23%3.23%
30 yr refi3.79%3.84%
15 yr refi2.98%3.01%
Rate data provided
by Bankrate.com
View rates in your area
 
Find personalized rates:
Index Last Change % Change
Dow 17,164.95 -251.90 -1.45%
Nasdaq 4,635.24 -48.17 -1.03%
S&P 500 1,994.99 -26.26 -1.30%
Treasuries 1.68 -0.08 -4.34%
Data as of 3:08pm ET
Company Price Change % Change
Bank of America Corp... 15.15 -0.28 -1.81%
Apple Inc 117.16 -1.74 -1.46%
Microsoft Corp 40.40 -1.61 -3.83%
AT&T Inc 32.92 -0.04 -0.12%
General Electric Co 23.89 -0.19 -0.79%
Data as of Jan 30

Sections

After a terrible month for stocks, a star analyst says look to biotech, consumer and manufacturing companies. More

Many in the middle class, particularly the single and the elderly, won't see any tax breaks under Obama's MIddle Class Economics plan More

Here's where Seahawks and Patriots fans eat, shop, and play, according to data from ad tech startup PlaceIQ. More

Wix is advertising in the Super Bowl -- but it's just the latest tech unknown to make its debut there. More

401(k) balances reached a record high last year, thanks to a soaring stock market and larger contributions from workers participating in the savings plans, according to Fidelity. More

Most stock quote data provided by BATS. Market indices are shown in real time, except for the DJIA, which is delayed by two minutes. All times are ET. Disclaimer.

Morningstar: © 2015 Morningstar, Inc. All Rights Reserved.

Factset: FactSet Research Systems Inc. 2015. All rights reserved.

Chicago Mercantile Association: Certain market data is the property of Chicago Mercantile Exchange Inc. and its licensors. All rights reserved.

Dow Jones: The Dow Jones branded indices are proprietary to and are calculated, distributed and marketed by DJI Opco, a subsidiary of S&P Dow Jones Indices LLC and have been licensed for use to S&P Opco, LLC and CNN. Standard & Poor's and S&P are registered trademarks of Standard & Poor’s Financial Services LLC and Dow Jones is a registered trademark of Dow Jones Trademark Holdings LLC. All content of the Dow Jones branded indices © S&P Dow Jones Indices LLC 2015 and/or its affiliates.