While it’s debatable, the biggest business story Thursday was the three-hour trading halt at Nasdaq Stock Market.
The Wall Street Journal called the problem “unprecedented” for a U.S. exchange, leaving many to wonder what exactly is happening:
A technical glitch knocked out trading in all Nasdaq Stock Market securities for three hours Thursday afternoon, an unprecedented meltdown for a U.S. exchange that paralyzed a broad swath of markets and highlighted the fragility of the financial world’s electronic backbone.
Nasdaq officials scrambled to figure out what happened and resume trading. They shared few of their findings with trading firms or the public during regular trading hours, sowing confusion across Wall Street and leaving many investors frustrated.
The decision to reopen trading with about 35 minutes to go before the close came after exchange officials were sure that banks and brokers had enough time to prepare for securities to trade again, people familiar with the discussions said. Some hiccups persisted after Nasdaq reopened trading, though Nasdaq told traders that the markets closed normally Thursday.
“Our systems, and the industry’s, have to get to a higher level of robustness,” said Robert Greifeld, chief executive of Nasdaq parent Nasdaq OMX Group Inc., in an interview.
Nasdaq said it plans to work with other exchanges to investigate Thursday’s outage, which centered on a problem with the data feed supplying U.S. markets with trade information, and supports “any necessary steps to enhance the platform.”
Nasdaq officials internally pointed to a “connectivity” problem with rival NYSE Arca, according to people familiar with the matter, that led to price quotes not being reported. Nasdaq officials say their technicians should have been able to manage the problems and avoid the halt. A person close to NYSE Euronext said the exchange was confident that regulators will review the outage thoroughly.
The beginning of Bloomberg’s story chose to focus on the names that trade on the exchange and the volume that was lost:
Many of the country’s most-traded shares, from Apple Inc. (AAPL) to Intel Corp. and Facebook Inc., ground to a virtual standstill as brokers were unable to execute customer orders. Nasdaq equity indexes didn’t update during the outage and volume in stocks listed on the New York Stock Exchange also dwindled as liquidity dried up around the country.
“The real fear is that we get stuck wearing some kind of risk because of an interruption that is not of our doing,” Max Breier, a senior equity derivatives trader at BMO Capital Markets Corp. in New York, said in a phone interview. “Any halt in information or ability to trade is going to hinder our ability to manage our risk and take positions.”
The malfunction in the data feed system known as the securities industry processor was fixed in the first 30 minutes and a regulatory halt for all Nasdaq-listed securities was issued to “protect the integrity of the markets,” Nasdaq said in a statement after the close of trading.
The New York Times story offered this context about how often trading glitches happen and how the increasing reliance on technology can sometimes cause problems:
The breakdown came just two days after Goldman Sachs accidentally sent out a barrage of errant trades that disrupted the exchanges where options are bought and sold. The two episodes have amplified questions about the reliability and integrity of financial markets that companies depend on to raise money and Americans trust with their retirement savings.
More than a year ago, the eagerly awaited market debut of Facebook shares was marred by a delay and technical problems. In May 2010, computer malfunctions were blamed for the “flash crash” when a flurry of stocks plunged to $1 or less and the Dow Jones industrial average plummeted more than 700 points in a matter of minutes.
While regulators and market participants have taken several steps to strengthen their systems, the problems this week suggest that the flaws in the markets have not been repaired, and may actually be getting worse.
The persistence of technical flaws — each seemingly coming from a different part of the system — has been blamed on the complexity of the trading technology and the fragmentation of the market itself. In contrast to the days when the New York Stock Exchange competed only with the Nasdaq, today there are 13 public exchanges competing in a fast-changing and low-margin business.
The USA Today story chose to focus on the reputational risk that Nasdaq faces as trading was halted:
The question is whether this latest issue may cause problems with Nasdaq as it courts traders to use the system and young companies to list their shares at the exchange. Problems have periodically plagued the Nasdaq. Most recently, there were trading problems with the initial public offering of Facebook in May 2012. Nasdaq was widely panned for its handling of the IPO, which opened with delays and caused errors with trading and quote systems.
Nasdaq OMX, the company that operates the Nasdaq exchange, had become synonymous with bringing high-tech to the markets. Its reputation as a technologically advanced exchange helped it lure top tech firms to trade there, including Microsoft, Intel and most recently, Facebook.
It’s premature to say that Nasdaq’s business will take a hit from the latest problem, (Gaston Ceron, analyst at Morningstar) Ceron says. Nasdaq isn’t the only exchange that has had problems. The Flash Crash of 2010, when the Dow Jones industrial average lost more than 1,000 points, dragged down all U.S. markets in about 15 minutes before recovering.
While it might be early to tell the repercussions, it does seem that Nasdaq’s track record as the scrappy exchange with the best technology is slowly eroding as problems occur. It might not have cost Wall Street firms a lot of money, but what about the person looking to sell stock for a down payment on a home or to pay bills? Obviously not the end of the world, but it’s definitely yet another blow to investors’ confidence – one that’s likely not needed.
