The rude awakening received by shareholders of Mega Brands Inc. may be a stark reminder: Computer programs are only as smart as the people who operate them.
The shares of the Montreal-based toy company had a wild opening, plunging 20 per cent in the first few minutes of trading before bouncing back dramatically, gaining back all those declines and then some. While the details of the strange ride remain sketchy, it looks likely that a mix-up involving the company's share consolidation and a programmed "sell" order may have caused a computer program to automatically sell the stock in the opening seconds of the day before the error was caught.
The stock began the day at a lofty $10 - a big change from its close of 50 cents on Tuesday. That was because the company's previously announced 1-for-20 share consolidation (sometimes called a reverse stock split) took effect at Wednesday's opening bell. Within seconds, though, the stock started falling - fast.
Before a minute of trading had passed, it had dropped to $8. Seconds after that, there were trades posted as low as $5.51, but all the trades below $8 were subsequently cancelled, according to trading data provided by Bloomberg.
After a lull of several minutes in trading, the stock came storming back. By 10 a.m., it was above $10 again, and remained in positive territory the rest of the day.
The root of the dramatic action would appear to lie in the share consolidation, which drastically changed the share price - and a programmed trade that somehow didn't get the message straight.
"I think the early-morning trades were incorrect trades. Certain individuals perhaps weren't aware of the details of the share consolidation," said Peter Ferrante, vice- president and chief financial officer of Mega Brands.
Trading sources theorized that a trading program wasn't updated properly - or wasn't updated at all - to reflect the impact of the share consolidation on Mega Brands' stock price. So when the stock opened at 20 times its previous close, the program would have read this as a price above the level at which it had been instructed to automatically sell - so, it did.
Buyers, seeing the steady flow of sell orders hitting the market, would have taken advantage by offering to buy them at progressively lower prices. The trading program would have been willing to sell at these falling prices, because the price was still far above the levels that triggered its instructions to sell.
A single trading desk, at CIBC World Markets, was responsible for almost all the sell orders in the opening minute, executing dozens of trades, generally in 500-share chunks. CIBC World Markets declined to comment and there's no way of knowing whether it was the seller or whether a client placed the sell orders through CIBC's trading desk.
David Thomas, spokesman for the Investment Industry Regulatory Organization of Canada - the market regulatory authority - said "We're aware of it," but otherwise declined further comment.
Mr. Ferrante of Mega Brands stressed that there shouldn't have been any confusion in the market about the consolidation - the company had disseminated the details well in advance. Mega Brands announced on May 25 that its board had approved the consolidation, and on June 10 it confirmed that it had been approved by shareholders and regulators - at that time stating that it would take effect at the opening on June 15.