Electronic Trading Outages – Is the Heat on Nasdaq Justified?

Shawn Kaplan
September 20, 2013

Over the past year we've seen a surprising number of technological glitches which have had serious ramifications on the credibility of the Capital Markets structure. Are these justified or is this being overblown? Recently, CNBC ran an interesting interview with Harvey Pitt (former SEC Chairman) and while they do not come to any firm conclusions, it is clear that these outages, and the concern over the transition to electronic trading is under heavy fire. So much so, that Mary Jo White, the new Chair of the SEC has begun an investigation into the testing procedures of the exchanges. The head of the SEC getting involved in rather small technical issues, really?

This latest outage is just one of several outages in a string of events including the botched IPO of Facebook on NASDAQ which put a serious black eye on the most hotly anticipated IPO since the credit crisis of 2008. NASDAQ was fined $10million for their part in that failure and may have cost Facebook execs quite a bit more. The reputational impact was so large that it may also cost NASDAQ the upcoming Twitter listing. And in August 2012, Knight nearly collapsed when a software bug cost the firm $440 million in trading losses requiring the firm to undertake an emergency recapitalization and then shortly thereafter sell themselves outright to Getco to pay back for the bailout.

Is all of this focus justified? Personally, I side with the technologists on this one and with NASDAQ. Bob Greifelds's interview with CNBC takes responsibility for their involvement, does not make excuses, but admits these are complex systems which have failure points. Industry experts all seem to admit that these will happen from time to time, particularly with systems which are managed by such a diverse set of institutions and interfaces it is nearly impossible to maintain 100% stability. By comparison, The Amazon Cloud has now gone down several times, halting service on top named web sites such as Facebook, Twitter, and Instagram.

In today's digital economy, the impact of computer glitches and IT infrastructure has never been greater and firms need to prioritize the rather unglamourous aspects of IT testing procedures and ensure their infrastructure is running in datacenter facilities they can trust.

Reference articles:

Reuters: NASDAQ pricing system focus of SEC outage review

http://www.reuters.com/article/2013/08/27/us-nasdaq-halt-probe-idUSBRE97Q0WS20130827

WSJ: Nasdaq in Fresh Market Failure

http://online.wsj.com/article/SB10001424127887324619504579028873794227410.html

Letter from Warner to Mary Jo White

http://op.bna.com/srlr.nsf/id/mlon-9aup7a/$File/warnerletter.pdf