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After Sandy, a flurry of stock market micro flash crashes

November 6, 2012: 12:15 PM ET

Traders say there were unexplained price swings and "quote spamming."

FORTUNE -- When stocks reopened for trading on Wednesday, for the first time since Hurricane Sandy, the market was a rare bit of calm. Stocks were bought and sold. Trading was never halted. The market even went up a bit.

To the average investor, it was an average day, and, other than what lead up to it, an unexciting one at that.

But while the damage of Hurricane Sandy outside the New York Stock Exchange was easy to see, the problems inside the building and on the electronic networks in which stocks increasingly trade hands were much harder to detect. But they were there nonetheless.

On Wednesday, there were 221 instances in which individual stocks briefly spiked or plunged in price for no particularly reason, according to market research firm Nanex. So-called micro flash crashes have been rising for a while - micro because they affect only one stock rather than the whole market - even on normal days. They are usually caused by a mismatch of buyers and sellers. They usually number less than 50.

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Wednesday's total was the second highest of the year, behind only August 1st, which had 299 micro flash crashes and is the day a computer glitch caused Knight Capital to execute millions of faulty trades, costing that firm nearly a half a billion dollars.

Another problem in the wake of Sandy: Quote spamming. Nanex and other market watchers reported an unusually large number of bogus stock quotes - orders to buy or sell that are were never completed. For instance, by mid-day Thursday there had been 7.3 million quotes to buy or sell shares of Bank of America. Actual transactions: 65,000. The rest of the orders had been posted to the exchanges and then quickly cancelled. Bank of America (BAC) appeared to be one of a dozen or so companies with shares that were hit by quote spamming. Others included Netflix (NFLX) and Prudential (PRU).

High frequency traders are often accused of flashing orders they don't intend to complete to manipulate the market. Exchanges are supposed to weed out bogus quotes. But they seemed less able to do so in the days after Sandy. Sal Arnuk and Joe Saluzzi of Themis Trading, who have been critical of HFT, blamed a rule change at the Nasdaq for the bogus quotes. Nasdaq denied it caused the problem.

It's not clear why there were more micro flash crashes than usual. Eric Hunsader, the head of Nanex, says a large number of Wednesday's crashes happened shortly after the market open, which is when the trading that occurs on the actual NYSE floor matters the most. Fewer floor brokers at the NYSE might have played into that. What's more, the volume of trading was lighter than usual after Sandy, probably because Wall Streeters in general had trouble getting to their offices. The light volume may have contributed to the problems as well.

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A NYSE spokesperson said the exchange would look into Nanex's data.

The good news is that the number of micro flash crashes has fallen. On Friday, there were just 82. What's more, most of the mini crashes result in prices that are only $0.50 higher or lower than they should be. As a result, most people don't notice. Hunsader says very few of the bad trades are ever cancelled. Nonetheless, if your trade crosses at that nanosecond, you paid more or got less than you should have. And if it happens on a large order for say a mutual fund, all those half dollars can add up.

In the end, of course, the fact that the NYSE was able to open up for trading just over a day after Hurricane Sandy hit downtown Manhattan is more important than the trading glitches. We're better prepared for actual disasters than we were after 9/11.

At the same time, though, Sandy showed that, once again, below the surface of our increasingly fractured market, were trades happen in dark pools and elsewhere, unexpected market stresses are causing larger and larger cracks. How long before the market has its own 100-year-storm is hard to tell.

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About This Author
Stephen Gandel
Stephen Gandel

Stephen Gandel has covered Wall Street and investing for over 15 years. He joins Fortune from sister publication TIME, where he was a senior business writer and lead blogger for The Curious Capitalist. He has also held positions at Money and Crain's New York Business. Stephen is a four-time winner of the Henry R. Luce Award. His work has also been recognized by the National Association of Real Estate Editors, the New York State Society of CPA and the Association of Area Business Publications. He is a graduate of Washington University, and lives in Brooklyn with his wife and two children.

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