CORRECTED-Traders warn over European repeat of Knight glitch
(Corrects headline to "Knight glitch" from "NYSE glitch")
By Luke Jeffs
LONDON Aug 2 (Reuters) - Europe's top exchanges could be hit by a technology glitch like the one that disrupted Wednesday's trading on the New York Stock Exchange, traders have said.
Knight Capital Group Inc, one of the largest firms on NYSE, said a technical glitch caused wild trading in 140 stocks as the market opened on Wednesday, forcing the broker to tell clients to send orders elsewhere.
The nature of the tech issues were unclear but the malfunction has prompted questions over whether Europe's top exchanges, such as the London Stock Exchange or Deutsche Boerse could be similarly affected.
"If an algo went wrong in New York, an algo could go wrong in London or Frankfurt. There's no reason why it couldn't happen in Europe. We have no extra controls or protection," said the head of electronic trading at one of the largest European trading banks.
Knight said the glitch occurred in its United States market-making unit, part of the business that quotes buy and sell prices on shares.
European traders pointed to the fact that market-making is more popular in the United States so its exchanges are more vulnerable to a market-making glitch than those in Europe.
"The New York Stock Exchange has a handful of very large market-makers so there is concentration risk that doesn't exist on European exchanges where market-making is less centralised," said the head of trading at a large European bank.
"That said, you can never say never and machines are trading the vast majority of European stocks and the one thing we know about machines is that they fail."
The traders also said European exchanges have in place strict circuit-breakers that shut down trading in a particular stock if it breaches certain price limits, though these are also in place at NYSE.
"There can always be rogue algorithms but I'm surprised that neither the broker nor the exchange systems picked up on it, especially after the regulatory changes post the flash crash," said Simmy Grewal, a senior analyst at research house Aite Group and a former trader.
Wednesday's erratic price movements reminded traders of the May, 2010 "flash crash" in which nearly $1 trillion was wiped off U.S. shares in just a few minutes, sparking anger among investors and regulators.
High-frequency trading (HFT), where hedge funds use ultra-fast computers to profit from tiny price discrepancies, was initially blamed by some U.S. politicans for causing the crash.
But a report by the Securities and Exchange Commission found it was the sudden sale of a massive $4.1 billion position in stock-index futures by an institutional investor rather than HFT activity that prompted the crash.
Xavier Rolet, the Chief Executive of the LSE, was called before a panel of British politicians in October, 2010 and asked if a flash crash could happen in Europe.
"The LSE has circuit breakers and there is no automatic routing on from the exchange. When we go into auction, the whole market stops because we remain the central price formation mechanism," said Rolet.
The UK exchange chief cited the onward routing of trades by exchanges and the continuation of trading on alternative venues after the main U.S. exchanges had suspended as reasons for the flash crash. (Editing by David Cowell)
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