Sometimes when things go wrong on Wall Street, they go very wrong very quickly. As demonstrated by Thursday’s Nasdaq outage, this is increasingly true in a highly electronic, massively complex, and interconnected marketplace. Small and often totally unforeseen technical errors have the potential to shut down exchanges, botch initial public offerings, and send false orders.
This happened not just to the Nasdaq OMX Group (NYSE:OMX) last week but to Goldman Sachs (NYSE:GS), as well, when a glitch issued a torrent of erroneous options trades. One of Goldman’s trading systems last week misinterpreted market data and issued a huge number of trades that were vastly out of sync with the market. Sources familiar with the matter told Reuters that although NYSE Euronext (NYSE:NYX), the exchange on which most of the trades were placed, cancelled most of the trades, the bank could still lose tens of millions of dollars.
The exchange reported on August 20 that “trades eligible for Obvious Error treatment where at least one party to the trade is not a Market Maker will be busted by the Exchange absent special circumstances. As a result, as permitted by the Rules, we anticipate that most of the impacted trades will be busted.”
While the financial fallout from the Goldman glitch was relatively minor — nothing like the $461 million loss suffered by Knight Capital in August 2012 — it has exacerbated concerns among regulators, traders, and investors over the nature and safety of securities exchanges, according to Reuters.
Problems associated with electronic trading were blamed for an incident in May 2010, when the Dow lost nearly 1,000 points in 20 minutes. Critics have blamed the Securities and Exchange Commission for not acting fast enough to investigate how regulation could help make the practice safer. One popular piece of legislation up for discussion is a mandatory “kill switch” that would allow firms and exchanges to quickly deactivate a rogue program.
Goldman’s options glitch and the Nasdaq outage come as exchanges are testing all-electric trading systems designed to prevent the full closure of markets if another storm like Hurricane Sandy threatens to shut down the East Coast again.
As a result of the incident, Goldman has reportedly put four senior technology specialists on leave.