The WPO Circuit Breaker: What Happened

The circuit breakers get christened, but there are still clear problems with order handling practices and the splitting up of liquidity.

The Washington Post Co. was the first stock that triggered the new circuit breakers. At 3:07pm ET, WPO was trading at roughly $454.

Suddenly, there were three trades over $900 off the NYSE floor: a 100-share trade at $929.18, a 200-share trade at $919.18, and a 400 share trade at $919.18, all at the same time.

All of these trades were subsequently cancelled, but they were sufficient to trip the circuit breakers. When trading resumed 5 minutes later, the stock traded back around $454.

What happened? This seems to be clearly erroneous trades, but no official statement has been issued yet.

It is likely not an accident that the first circuit breaker was tripped:

1) on a market order;

2) in the second highest priced stock;

3) that is almost among the most thinly traded.

Why is this important?

One: this was obviously a market order or a series of market orders. If the person who made the bid had put in some kind of limit order (only buying up to $460, for example) the trade would not have happened. This again goes to the problem with using market orders in a volatile market.

Two and Three: a high-priced stock that is thinly traded. How thinly traded? It trades about 60,000 shares a day. That's thin! That means there are few orders on the books, anywhere. Why? Trading books have been thin and getting thinner for years — because electronic traders pick off orders.

So what happened? One possibility is that a buyer entered a clearly erroneous trade of $900 and it was executed.

Another possibility is that there were few, if any, offers on the books. So if a buyer put in a market order for, say,1,000 shares, perhaps 300 were executed at the current price — around $454 — and then — for a tiny fraction of a second--there were no other orders in that neighborhood.

Under Reg NMS, the order for the remaining 700 shares is routed automatically to the venue with the best offer. The next best offer may have been at $929 or so, off the exchange, even if just for a fraction of a second.

It seems crazy, but when books are thin, volume is light, liquidity is split into many venues, and order handling practices are still not entirely clear, it is possible for something like this to happen.

Circuit breakers do not cure everything.

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