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Options Dealers Lose Millions Amid Stock’s Plunge

August 16, 1994

WASHINGTON (AP) _ The Nasdaq Stock Market, the electronic exchange bedeviled by technical problems this summer, now has incurred the wrath of options traders.

The latest source of the Nasdaq’s woes involved a botched trading halt of a Canadian technology company listed on the exchange, Newbridge Networks Corp.

The Aug. 1 mistake led Nasdaq to cancel trades involving 221,000 shares of Newbridge and was a factor in substantial losses by several options market makers on the Pacific Stock Exchange, traders said.

″The fact that trading went on after the halt is just ludicrous and led to tremendous losses for some people,″ Bill Napoli, president of an options trading firm on the Pacific Stock Exchange, said Tuesday. Napoli’s firm is the main market maker for stock options in Newbridge.

Stock options are contracts that give holders the right to buy a stock at a specified price. Options can be used to bet on the rise or decline of a stock’s price. Although Newbridge stock trades on Nasdaq and the Toronto Stock Exchange, the options trade on the PSE.

Napoli lost at least $450,000 in the episode, and he estimated Pacific Stock Exchange options traders collectively lost about $2 million.

Last week, Napoli filed a federal lawsuit accusing three speculative investment funds with insider trading in Newbridge options; the suit doesn’t name the Nasdaq Stock Market.

Pacific Stock Exchange spokesman Dale Carlson said the $2 million loss estimate was ″in the ballpark″ and the exchange is investigating. A telephone message left with Newbridge wasn’t immediately returned Tuesday.

The Newbridge case follows a string of unrelated missteps this summer for Nasdaq, the Washington-based national network of electronically linked stock dealers that has grown to rival the New York Stock Exchange in trading volume and advertises itself as ″the stock market for the next 100 years.″

Computer problems halted the opening of Nasdaq for about 2 1/2 hours on July 15. The market suffered a 34 minute outage on Aug. 1 because of a squirrel suspected of chewing a power line leading to its Connecticut computer center. A backup power system didn’t perform properly.

The Newbridge mishap began at about 9:25 a.m. on Aug. 1, when the Kanata, Ontario-based firm called Nasdaq and requested a halt in trading Newbridge shares due to an upcoming news announcement.

Stock markets routinely halt trading in stocks when news is pending. The theory behind a halt is to give all investors timely access to the news before trading resumes.

Nasdaq spokesman James Spellman said because the market was given such short notice, trading wasn’t halted until 9:32 a.m., two minutes after the opening. The day also was a national holiday in Canada, further complicating communications, he said.

Newbridge later announced a disappointing earnings forecast. That news was blamed for subsequently sending the company’s stock price down by more than $13 a share, or by about 30 percent in a single day.

Before shares resume trading on Nasdaq, the market gives a five-minute period so dealers can determine pricing trends and update their quotes. Nasdaq planned to let Newbridge resume trading at 11:45 a.m., after the five-minute pricing period that would have started at 11:40 a.m.

But due to a human error, Nasdaq sent a message to the market that incorrectly said trading would open five minutes early at 11:40 a.m., said Lynn Nellius, Nasdaq’s director of market surveillance.

Nasdaq later canceled trades involving 221,000 shares that occurred between 11:40 a.m. and the intended opening of 11:45 a.m., since the trades violated its rules.

That meant some investors who thought they had sold Newbridge stock during the five minute period would have to go back and sell the stock again, after the price had declined further.

Nellius said he couldn’t recall such an error in his four years with Nasdaq. The market has taken steps to prevent a recurrence, he said.

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