Nasdaq Breakdown: What Happened and What It Means
On Thursday morning, the NASDAQ OMX Group (NASDAQ:NDAQ), which operates the eponymous tech-heavy exchange, reported that the “UTP [unlisted trading privileges] SIP [securities information processors] experienced momentary interruptions in quote dissemination across all UQDF [UTP plan quotation data feed] Channels from approximately 10:57 to 11:03.”
To put it another way, the Nasdaq was having problems managing quotes for stocks listed on multiple exchanges. The SIP processes price data for stocks in real time across 13 exchanges, and it is critical that the price of any given stock is correlated appropriately across all of them. Otherwise, traders would have an impossibly difficult time determining what is the best — or even correct — price of a stock. Shares of a company could be trading for two different values on two different exchanges.
At the time, the problem was thought to be temporary, and Nasdaq announced at 11:45 a.m. EST that “all channels are now operating normally.”
But less than an hour later, it was clear that the issues were still not resolved. At 12:09 p.m. EST, the exchange operator announced that Nasdaq, Nasdaq BX, and Nasdaq PSX were all experiencing issues with quote submission to the UTP SIP. Five minutes later, the operator announced that it was halting all trading in Tape C securities — those that are listed on multiple exchanges — until further notice. Shortly after that, all options markets trading on the Nasdaq was halted.
It’s still unclear what exactly went wrong, but the issue appears to have been resolved. Trading was brought back online in stages, with each stage preceded by a 15-minute quote-only period in order to reduce volatility. All told, despite a lot of bad press, it appears as if the markets themselves weathered the glitch well. All three major indexes ended the day in the green, and trading on other exchanges was not particularly volatile during the outage.
But the outage, to put it bluntly, was an embarrassment for the Nasdaq OMX group. Shares closed the day down 3.4 percent amid a public relations firestorm. The technical snafu evoked specters of glitches past, such as the ordeal with the initial public offering of Facebook (NASDAQ:FB).
Public reaction to the freeze was half anger, half amusement. USA Today Money alluded to an infamous outage nearly three decades ago:
In 1987, a squirrel caused a blackout that took down the Nasdaq for 82 minutes. No squirrels have been sighted near the exchange today.
— USA TODAY Money (@USATODAYmoney) August 22, 2013
As the freeze wore on with no new news to report, pundits on CNBC got stuck in a decabox:
— Joseph Weisenthal (@TheStalwart) August 22, 2013
But while Thursday’s freeze was ultimately rather painless, it did revitalize concerns that securities exchanges have become too massive and complicated to effectively manage.
“It’s not like your cable going out for a day,” Jim Lowell, president of Adviser Investments, told USA Today. “This is not going to lend a lot of confidence to investors who are already under-confident about the fairness and value of the system. It couldn’t have come at a worse time for investor confidence. Investors are feeling as vulnerable as a hedgehog in the middle of the road.”