Technical Glitch Sends Berkshire Hathaway Down 99%: NYSE Rectifies Erroneous LULD Halts

Technical Glitch Sends Berkshire Hathaway Down 99%: NYSE Rectifies Erroneous LULD Halts

On June 3rd, 2024, Berkshire Hathaway's stock price appeared to plummet by 99% due to a technical issue with the NYSE's trading system. This anomaly was caused by an error in the Limit Up/Limit Down (LULD) price bands related to a new software release. The NYSE has since resolved the issue by reverting to a previous software version and is currently assessing the impact of the erroneous trading halts.

Key Takeaways

1. Berkshire Hathaway's dramatic stock drop of 99% was due to a technical glitch, not actual market activity.
2. The issue originated from a new software release affecting the LULD price bands between 9:30 AM and 10:27 AM.
3. NYSE resolved the problem by switching to a secondary data center running an older software version.
4. NYSE is evaluating which halts were erroneous to potentially reverse those trades.

Analysis

The unexpected drop in Berkshire Hathaway's stock price on June 3rd, 2024, sent shockwaves through the market, alarming investors and traders. However, it was soon clarified that this plunge was not reflective of the company's performance but was caused by a technical issue at the New York Stock Exchange (NYSE). The issue involved the Limit Up/Limit Down (LULD) price bands, which are mechanisms designed to prevent extreme volatility by halting trading if a stock's price moves outside predetermined bands.

The problem arose due to a new software release that inadvertently published incorrect price bands, triggering erroneous trading halts. Between 9:30 AM and 10:27 AM, 49 symbols, including Berkshire Hathaway, experienced trading pauses. To mitigate the issue, the Consolidated Tape Association (CTA) switched operations to a secondary data center running the previous software version, thereby stabilizing the trading environment.

The NYSE is currently working on identifying which halts were a result of the erroneous price bands and is considering busting those trades to correct the records. This incident highlights the critical importance of robust testing and validation procedures for software updates in financial systems, where even minor errors can lead to significant market disruptions.

Did You Know?

The Limit Up/Limit Down (LULD) mechanism was introduced by the U.S. Securities and Exchange Commission (SEC) in 2012 to prevent extraordinary market volatility. It came as a response to the "Flash Crash" of May 6, 2010, when the Dow Jones Industrial Average plummeted about 1,000 points in mere minutes before recovering most of the losses. The LULD mechanism imposes price bands based on a percentage move from a security's average price, and if a stock's price moves outside these bands, trading is halted to prevent panic selling or buying.

For example, if a stock is trading at $100, the LULD mechanism might set the lower limit at $95 and the upper limit at $105, meaning trading will be paused if the price falls below $95 or rises above $105. These limits are recalculated throughout the trading day based on the stock's average price over a short period. This helps to maintain orderly markets by preventing large and rapid price swings, ensuring that prices reflect genuine supply and demand rather than momentary imbalances or errors.

The Consolidated Tape Association (CTA) and the Securities Information Processor (SIP) play crucial roles in this process. The CTA SIP consolidates and disseminates real-time trade and quote information for securities listed on the NYSE and other participating exchanges. This information includes the current price, volume, and the LULD price bands. By providing a single, reliable source of market data, the CTA SIP ensures that all market participants, from individual investors to large institutions, have access to the same critical information, helping to maintain transparency and fairness in the markets.

An error in the LULD halts by the CTA SIP, as seen in the Berkshire Hathaway incident, can cause significant disruptions. If the CTA SIP publishes incorrect price bands due to a technical issue, as happened on June 3rd, it can trigger erroneous trading halts. For instance, if the system mistakenly sets a lower limit far below the actual market value, it could cause the stock to appear to plunge dramatically, leading to automatic trading pauses. These false halts can cause widespread confusion and volatility, as investors react to the misleading data. Correcting these errors involves reverting to reliable software versions and carefully evaluating which trades were affected to restore normal market operations.