It’s Time For Public Corporations To Speak Up About Flash Crashes
It happened again. Two more multi-billion corporations traded at prices on the NYSE which were more than 50% away from their current valuation. The two companies involved were American Electric Power (AEP) and NextEra Energy (NEE).
Yesterday, we sent a note out explaining what we think happened:
1) During Phase 1 of the new Limit Up/Down circuit breakers, halts do not take effect till 9:45am and stop at 3:30pm. Phase 2 will not start till August and then LULD will be in effect from 9:30am to 4pm.
2) NYSE was “asked” to remove their LRP’s once LULD went live.
3) Most of the errant trades this morning happened on the NYSE.
4) For the first 15 minutes and the last 30 minutes of the day, the market is left unprotected.
Also curious was that none of the errant trades were broken, even the ones that were more than 50% away from the market. These trades were allowed to stand and marked with an “H” meaning “aberrant”. And then presto, the “H” trades were struck from the low of the day, as if they never happened. We’re not sure why the seller(s) didn’t request a trade break from the NYSE. But if they had, the clearly erroneous trade policy would have broken many of the egregious trades.
While we as institutional traders understand the mechanics of the stock market, it’s quite apparent that investor relations executives and CFO’s at public corporations do not. Arguably, these are one of the most important constituents in the capital markets. It is their stocks that we are trading all day and they deserve to know how the stock market has changed over the past fifteen years.
Yesterday, it was clear that the NextEra CFO was not happy with the price plunge in his stock. According to Bloomberg, he said:
“We are continuing to try to understand exactly what happened in the first few minutes of trading in our stock this morning,” Moray Dewhurst, chief financial officer of NextEra, said in an emailed statement. “This is naturally a concern for all our shareholders and potential shareholders. This type of market behavior is not what we would expect from a well- functioning and well-regulated exchange.”
We agree. This type of market behavior should not happen at a stock exchange. We think that public corporations should expect and demand more from their listing exchange and our regulators. But we also think it’s the public corporations responsibility to understand the mechanics of the stock market. And if they find things they don’t like, then they need to speak up so the folks in DC can finally understand that there is a problem.