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Market Complexity To Blame for Nasdaq Trading Halt

Observers say the three-hour trading halt impacting Nasdaq securities last week points to market complexity of operating 13 stock exchanges, while ignoring the market data infrastructure.

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.

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 the capital markets. As an industry expert, Ivy has reported on a myriad ... View Full Bio

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IvySchmerken
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IvySchmerken,
User Rank: Author
9/3/2013 | 2:12:37 PM
re: Market Complexity To Blame for Nasdaq Trading Halt
There already are tons of rules in place. The SIP was created in the 1975 amendments to the Securities Act. Nasdaq's decision to halt trading in its own listed securities was probably done according to the policies of the UTP/CTA Plan. Other venues that trade Nasdaq-listed securities ( ie., NYSE Arca, BATS, Direct Edge) are also members of the committee that governs the SIP. The question is does the market need a SIP if the consolidated feed is slower than the direct feeds purchased by professionals? Maybe the legislation is antiquated and needs to be revisited.
Greg MacSweeney
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Greg MacSweeney,
User Rank: Apprentice
9/3/2013 | 12:47:41 PM
re: Market Complexity To Blame for Nasdaq Trading Halt
The exchanges certainly do not want MORE regulation. They all complain that there is too much regulation already. However, if the exchanges continue to have outages, they will be inviting regulators to take an even closer look at their operations.
kiers
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kiers,
User Rank: Apprentice
8/31/2013 | 1:38:29 AM
re: Market Complexity To Blame for Nasdaq Trading Halt
when the glitch was fresh, CNBC and NYSE were sort of bad mouthing Nasdaq. Is nasdaq fronting the glitch as an excuse for new SEC regulation (which given the bad mouthing presumably implies the proposed SEC regulation will be against the interests of those other 2 exchanges, nyse and bats?)
IvySchmerken
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IvySchmerken,
User Rank: Author
8/28/2013 | 9:55:25 PM
re: Market Complexity To Blame for Nasdaq Trading Halt
You are correct. I could have used the world "fragmentation." With trading fragmented across 13 equity exchanges, the securities information processor(SIP) has to consolidate or centralize all the quotes and trade updates into a single feed. It's not clear whether the problem was with the SIP system or related to a break in connectivity with Arca. Both exchanges are reportedly blaming each other. They'll need to sort out their story. The SEC has asked both exchanges to create a timeline of what happened.
IvySchmerken
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IvySchmerken,
User Rank: Author
8/28/2013 | 9:18:08 PM
re: Market Complexity To Blame for Nasdaq Trading Halt
Maybe the glitch suggests that exchanges aren't maintaining the systems or infrastructure for the SIP? Exchanges have been focusing on creating their own direct feeds for sale to high frequency trading firms, electronic market maker and hedge funds.
ccarmichael282
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ccarmichael282,
User Rank: Apprentice
8/28/2013 | 9:07:32 PM
re: Market Complexity To Blame for Nasdaq Trading Halt
Ivy,
As always, great reporting here..I find it down-right amazing that you wrote this article about complexity WITHOUT penning the word "fragmentation". If this were a Mad-Lib(R) and we replaced COMPLEXITY with FRAGMENTATION, it would read the same.
KBurger
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KBurger,
User Rank: Author
8/28/2013 | 8:00:36 PM
re: Market Complexity To Blame for Nasdaq Trading Halt
David Weiss's comments seem to me "sad but true." If the problem is the complexity of the markets -- well, there's no going back on that, the markets probably are only going to become more complex (unless exchange consolidation ultimately simplifies them). Does the "new normal" have to mean system disruptions? Maybe short term, but ultimately traders won't stand for that and will take their business where they believe there is less risk of disruption. An opportunity for the Michael Bloomberg of tomorrow?
AALDRICH606
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AALDRICH606,
User Rank: Apprentice
8/28/2013 | 5:27:14 PM
re: Market Complexity To Blame for Nasdaq Trading Halt
Another point--this highlights the downside of consolidated feeds in today's global markets. A glitch from one firm disrupted trading of all Nasdaq-listed securities and underlying options--at all venues. Should give Europe cause for pause!
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