There s no question that technology has helped drive sagging markets around the world. As economies continue to struggle, and the effects of the 2008 global crisis refusing to fade, stock markets have seen-healthy gains in tech related stocks. However, technology s importance to market makers is not only manifested in the trading of shares of companies like Apple (NASDAQ: AAPL),
Microsoft (NASDAQ: MSFT) and Dell (NASDAQ: DELL), it s also what powers these exchanges.
Whereas the New York and London Stock Exchanges, among the other important "physical exchanges", had been institutions that utilized the human element to execute trades and find buyers and sellers, the introduction of the National Association of Securities Dealers Automated Quotations, or NASDAQ, in 1971 ushered in a new era of computer trading. Essentially, a virtual exchange run by a computer can facilitate orders easier than a human can, as well as find markets and execute trades more quickly. As technology developed over the ensuing years, so too did the instruments used in trading.
But has having machines replace humans in traditional stock trading eradicated problems and errors that had occurred in the past?
Based on recent events, the answer appears to be no.
On August 1, Knight Capital Group, a company specializing in executing large trades and one of the largest traders in the Unites States, was deluged with orders that quickly overwhelmed its computer systems. In the ensuing chaos, orders for various stocks piled up, causing wild fluctuations in stock prices. Trading in five stocks was temporarily halted. The Associated Press reported that Knight Capital suffered $440 million in losses from the glitch, a technological hiccup whose cause has yet to be specifically identified.
Far from being the exception, there have been other recent examples of technical mishaps plaguing stocks and exchanges. In May, the Facebook (NASDAQ: FB) IPO was marred by a series of trading errors that resulted in losses of a couple hundred million dollars. Kentucky-based stock exchange BATS Global Markets (NASDAQ: BATS), or Better Alternative Trading System, was humiliated by a technical glitch that not only affected share prices of major companies like Apple, but also caused the company to rescind its very own IPO that same day. This year alone, both the Johannesburg and Tokyo Stock Exchanges were forced to limit or halt trading due to electronic anomalies, and a meltdown of computerized trading technology in Madrid forced one of Europe s largest exchanges to shut down for four hours on Monday. Simply put, as computers are tasked with more responsibilities in executing orders and the process to carry out these tasks effectively become more complicated, as well as further overwhelmed, the opportunity for mistakes to occur is elevated. Additionally, as evidenced by the BATS and Knight Capital fiascos, the risks come with heavy costs and may be contributing an overall evacuation of liquidity in equities.
Despite the latest black eyes, computerized trading has been a boon to Wall Street.
Former New York Stock Exchange Chairman John Phelan, who passed away last Saturday, helped carry the exchange into the realm of technology in the mid 1980s as trading volume increased and new equity products were introduced. Automation and computerization of the NYSE helped lower costs for smaller investors and increase liquidity, contributing to
buoyancy never before seen in stock markets. Nevertheless, analysts are worried that the more complex technology running the world s stock exchanges, along with the major errors seen in electronic trading, will only increase as computers take on more roles in trading and order execution. As equity markets see less participation —some reports say that as much as $130 billion has emptied out of mutual funds over the last few years —there are those who will continue to point an accusatory finger at the state of electronic trading today.