Wiesław Rozłucki about the suspension of trade on the WSE: these are not drops, but an avalanche of orders from HFT

On Monday, the Warsaw Stock Exchange stopped trade for an hour. What actually happened? The editor -in -chief of Bankier.pl talks to Wiesław Rozłucki, a member of the GPW Council and its long -term president to explain the reasons for this unprecedented situation.

Andrzej Stec: Did the authorities of the Stock Exchange make the right decision, suspending trade for an hour on Monday? And what exactly caused this need to suspend the quotations?

Wiesław Rozłucki: In my opinion, the decision to suspend the trade was correct, and the stock exchange is prepared for such situations, as the article 124 of the WSE regulations speaks, among others. I would like to emphasize that Any speculation and guesses that the reason for suspension of trading was in the stock exchange are completely false. Suggestions are also untrue that this was related to the start of the American stock exchange at 15:30 (our time). The stock exchange suspended the quotations due to the growing number of ordersnot because of transactions or declines.

I understand, so the reason was the excessive number of offers, orders, not transactions. Can you explain it?

Wiesław Rozłucki: Yes, this is a known phenomenon on large stock exchanges, where Algo Trading systems have been operating for years and High-Frequency Trading (HFT)i.e. high frequency trade. Within a second, the system of one participant can introduce and cancel hundreds and even thousands of orders. The Warsaw Stock Exchange, although it is not one of the largest in the world, from time to time experiences such problems. On traditional exchanges, the ratio of the number of orders for transactions (Order to Trade Ratio) was about 3-4 orders per transaction. In participants using Algo Trading and HFT, this proportion can be several hundred or even several thousand orders per transaction. Often, forbidden practices such as Spoofing and layeringwhich are forms of market manipulation, consisting in creating a false impression of demand or supply without the intention to conclude a transaction.

In that case, was there a risk that this artificially overstated number of offers could lead to a failure of the WSE?

Wiesław Rozłucki: I certainly can't say that without being a member of the board at the time of the event. However, I can definitely say that The only reason for suspension of quotations was the excessive number of orders. They were not orders of thousands of small investors, but concentrated orders of professional brokers, probably foreign. Polish brokerage houses did not traditionally invest in software for sending hundreds of thousands of orders, because the Polish stock exchange was too small and the cost of such software would be unprofitable. It can be said that this type of accumulation of orders shows that the Warsaw Stock Exchange from time to time becomes a “greedy morsel”.

Did yesterday the session show that the WSE needs a new system?

Wiesław Rozłucki: I can definitely say that the new system that is implemented will be more efficient. But This was not a direct reason for its introduction. The stock exchange issued a message on this matter, and as a company listed on the stock exchange, the WSE must provide real information. Providing untruth would be a crime, so you can safely say that the reason was excess orders.

You mentioned the declines on other stock exchanges. Could it be related to the situation on the WSE? For example, the German stock market opened on Monday morning with a large decline. Could it be an organized action aimed at disturbing financial markets in Poland?

Wiesław Rozłucki: Absolutely not. Stopping trade on the WSE was not related to rapid drops in prices. HFT orders are not aimed at causing violent price movements in one side or the other. They “probe” the market to realize profit on minimal course fluctuations by sending thousands of orders. The causes of drops on the stock exchanges should be sought elsewhere. The increase in the probability of the recession, which Bank JP Morgan talked about, raising them from 40% to 60%, causes a decrease in share prices because the future profits of companies are forecast at a lower level. In a normal business cycle, we often do not know why the stock exchanges are starting to fall because they are ahead of the real economy. However, this time the situation is different. The direct cause of recent declines was The decision of President Trump regarding new customs rates announced on Wednesday at 22:00. Unlike a typical business cycle, this time we have a clear cause initiating declines. The reaction of markets was not an artificial influence, but a natural consequence of the expected recession and specific geopolitical events.

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