Does Nasdaq have its priorities straight? The Securities and Exchange Commission is right to worry that it doesn’t -- that the market is favoring lucrative high-speed trading customers at the expense of Uncle Jack in front of his computer at home in his slippers.
Nasdaq’s three-hour shutdown last week raises the question anew, but the SEC first identified it in March, when it proposed rules that would set standards for electronic trading and make the exchanges more accountable for preventing outages. The exchanges are pushing back, yet the events of last week make it clear: The SEC has to move quickly.
The culprit behind Nasdaq’s failure was a still-mysterious software error in its connection with the New York Stock Exchange’s electronic trading system. The breakdown meant that Nasdaq couldn’t collect all the pricing and order data through its securities information processor, or SIP, and distribute that data over what is called the consolidated tape. Nasdaq was thus unable to meet its legal obligation to be fair and transparent to all traders -- whether that is a $500 billion mutual fund or Uncle Jack.
Nasdaq Chief Executive Officer Robert Greifeld was right to call a systemwide halt, even though proprietary data feeds to professional traders continued. Otherwise, the national market system that Nasdaq is tasked with running would quickly have devolved into a private market in which high-frequency traders and hedge funds -- or anyone paying Nasdaq a fee for customized data -- held all the cards.
There have been many technology-related problems in recent years, including the 2010 “flash crash” and the flubbed Facebook Inc. initial public offering (another Nasdaq failure). Last week’s Nasdaq outage exposes a more serious flaw involving a bottleneck that obviously needs fixing. The data collection system was upended by a single point of failure. It can’t be right that, when one exchange’s SIP connection is broken, the global stock market and trading in options and related instruments must halt.
It is hard to accept at face value the market’s claim that it has invested adequately in technology, installed backup systems and stress-tested connections with other markets. The evidence points otherwise.
When the SEC in May settled charges with Nasdaq over the flawed Facebook IPO, the regulator was withering. Daniel Hawke, chief of the SEC’s market abuse unit, said, “Too often in today’s markets, systems disruptions are written off as mere technical ‘glitches’, when it’s the design of the systems and the response of exchange officials that cause us the most concern.”
News that BATS Global Markets Inc. is merging with its electronic-market rival, Direct Edge Holdings LLC, is another reason for SEC concern. The U.S.’s 13 stock exchanges, 50 or so privately traded dark pools, and dozens of brokerages that internally match bids and offers are consolidating in a race to get bigger and faster. Already, most transactions take place on supercomputers that match orders in millionths of a second. A BATS-Direct Edge combination would vault it ahead of Nasdaq, the No. 2 exchange behind the NYSE, in volume of shares traded.
Yes, the stock markets are complex, and most transactions occur at lightning-speed. And yes, technology will never work perfectly. But that’s all the more reason for the exchanges and the SEC to make sure the plumbing is as foolproof as possible.
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