NYSE-What did they do and When did they do it?

Posted by Morton Lane on May 24, 2010

Filed Under (Finance)

The NYSE state that given the declining markets of May 6 they slowed trading to facilitate an orderly decline.  The implication is that they were not responsible for the precipitous decline of almost 10,000 points.  (Of course, by the same token they can take no credit fro the immediate sharp rebound correction.)  They point to the fact that none of their stocks traded at those very low prices (P and G at $42 etc.) on the NYSE.

But the question is, did their action provoke an unintended consequence?  Faced with the inability to sell at NYSE, orders (electronic or discretionary) would be immediately routed to other exchanges.  There are now between six or nine alternatives to the NYSE depending of instrument.  Those exchanges would have been faced with a sudden and precipitous increase in volume of sales and reacted accordingly.  Even volume from seemingly directionless trading between underlying stocks and ETF’s would have switched orders to alternative exchanges.  The NYSE is no longer a monopoly.

Thank goodness those electronic algorithms quickly changed from sell to buy to correct the fall.  Certainly humans could not have reacted so swiftly.  Arguably the high frequency traders were the savior from even greater declines.

Potentially prudent moves by the NYSE thus could have indirectly caused the fast sell-off.  The question is, did they consult with or coordinate other Exchanges?  Trading time-outs without coordination between Exchanges is dangerous and unless corrected will cause further spike-like dislocations in the future.