August 27, 2013

Market participants have been reacting to last Thursday’s trading malfunction with Nasdaq’s consolidated quote feed, which led the stock exchange operator to halt trading halt in over 3,000 Nasdaq-listed securities.

Some are complaining about the lack of communication, others are asking why the backup didn’t work, while others are questioning the health of the infrastructure for disseminating market data.

When the problem occurred last Thursday shortly after noon, there was chaos as traders on desks had to figure out why prices were frozen. “If you are looking at locked markets and wonder what is going on. But if you’re an average retail person, you had no idea,” said Christopher Nagy, founder and president of KOR Trading, a market structure advisory and consulting firm in Omaha, Neb., who faulted Nasdaq’s CEO for not taking the podium to talk to the public. “They fixed the problem in 30 minutes. Then it took another 2 ½ hours to open the market. They should have had better communication,” said Nagy.

One investment manager said these more frequent technical mishaps are impacting confidence in the market. “I think it’s frightening when they close the second largest market in the country,” said Stephen Davenport, CFA, VP Wilmington Trust N. A., Wealth Advisory Services, Director Equity Risk Management in Atlanta.

Nasdaq said there was a break in connectivity between its system and another market participant. “There was a connectivity issue between an exchange participant and the SIP, which led to degradation in the ability of the SIP to disseminate consolidated quotes and trades. The cause of the issue has been identified and addressed,” according to Nasdaq’s statement.

Davenport, who trades options to hedge client portfolios, was not able to trade any options based on Nasdaq-listed securities. All the options for Nasdaq listed securities also stopped trading because there is no price on the underlying equities.

“It went down for close to 3 hours. I mean how long does it take to switch or reroute,” Davenport said on Thursday afternoon. Davenport also questions whether there was a back up and suggests the interruption is reminiscent of Hurricane Sandy.

During last October’s Hurrricane Sandy, exchanges also closed because the other stock exchanges relied on the NYSE’s floor-based market open to set prices. The NYSE has since filed a disaster recovery contingency plan with the SEC.

“Isn’t this like Hurricane Sandy?” asked Davenport, referring to the closure of all the electronic stock exchanges because they relied on the NYSE’s market open for pricing stocks.

“When you have a problem with a line of data and system, aren’t we redundant. Can’t you say I’m taking it off and here is where all the data is going to flow. Aren’t locations replaceable at this point?” asked Davenport.

However, some analysts are getting used to the sudden interruptions as a reflection of the complexity of moving high volumes of quote data through 13 stock exchanges.

“I know that people are freaking out about outages. I think it’s the new normal,” said David Weiss, senior analyst at Aite Group. To fix their technology issues, exchanges need to develop best practices for programming and pick a quality assurance methodology, QA, according to Weiss. “There are best practices, they don’t have to reinvent the wheel,” he says.

Weiss said that Nasdaq has one of the best tech shops among the exchanges, noting that it sells its market technology to dozens of exchanges around the world. “[With] All the other exchanges around the world running on Nasdaq Genium, you don’t hear about them having outages, said the analyst.

[What’s Causing The Recent Exchange Outages?]

Weiss contends the problem behind the technical mishaps is the complex market structure. “The biggest problem we have is the conflicts they’ve created through the complexity they’ve acquired through this multitude of order types, which is a follow on of Reg NMS,” says Weiss.

“This freedom post-Reg NMS to go after the concentration of liquidity that previously existed. Those order types are just tough. It’s not really a tech problem per se,” says Weiss.

But one expert said the trading halt points to problems with the centralized infrastructure of the securities information processor. Nagy of KORS Trading, “This is a plumbing/infrastructure issue. “ It cites yet another example of the complexities we’ve introduced in the marketplace without understanding what all the unintended consequences are. One is that we have not paid attention to a core piece of the infrastructure, the SIP which is core to quote dissemination.”

The question is what caused the SIP feed to fail, said Nagy. While Greifeld ruled out cyber terrorism or hackers, it appears to be message related. Even so, Nagy said the SIP has built in controls for that. They allocate bandwidth for each exchange to send in quotes. “It draws questions about single points of failure we have in the marketplace,” said Nagy.

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Ivy is Editor-at-Large for Advanced Trading and Wall Street & Technology. Ivy is responsible for writing in-depth feature articles, daily blogs and news articles with a focus on automated trading in ...