May 7, 2010 / 12:06 AM / in 7 years

NYSE says stock plunge validates its hybrid system

3 Min Read

NEW YORK (Reuters) - The New York Stock Exchange's trading system's emphasis on human judgment as well as computer power helped rein in Thursday's market turmoil, when the Dow Jones Industrial Average sustained its biggest intraday points drop ever, a senior executive at the Big Board said.

The exchange quickly made the point that unlike its electronic rivals, who have been grabbing market share from the NYSE in recent years, it has the ability to at least slow, if not halt, any signs of madness.

"It validates the decision to offer a hybrid market here where there's a human component married with the electronic," Louis Pastina, executive vice president of NYSE Operations, told Reuters in an interview.

"Before things get too out of hand, there's the opportunity to slow things down and allow common sense to be inserted into the process."

During the midafternoon sell-off, stocks fell precipitously and inexplicably. For example, shares in consumer products maker Procter & Gamble, which would normally be regarded as one of the safer, less volatile stocks to own, plummeted 37 percent within minutes. Consultancy Accenture PLC, which would also be seen as relatively conservative, saw its shares sink from around $41 to just a penny.

In contrast to the Big Board, all-electronic counterparts such as Nasdaq Stock Market, run by Nasdaq OMX Group Inc, BATS, Direct Edge and Archipelago, the New York Stock Exchange has a system built-in that includes human intervention when there are unusual share price and volume shifts.

Both NYSE and Archipelago, which Pastina acknowledged does not offer the same safeguards as the NYSE, are operated by NYSE Euronext

"We have an auction component which is built into our market that allows for physical auctions to be conducted to discover the correct price at any time during the day," Pastina said.

When the safety measures -- called liquidity replenishment points -- are triggered, NYSE sends out a message to traders and the public saying it is looking for buyers or sellers in an effort to discover the stock's correct price.

Pastina said that if the exchange receives an order that looks unusually large or is at a price that is nonsensical, it will often track down the investor or trader to make sure it wasn't the result of a typing error or some other mishap.

In contrast, he said, most electronic markets continue to trade electronically until there are no more buyers.

In 2007, new market rules allowed for trading to take place around any market that says it is conducting an auction.

"We didn't make the rules but we have to live by them," Pastina said.

"Obviously the value of an Accenture share is not a penny."

Reporting by Phil Wahba; Editing by Phil Berlowitz

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