Thursday’s Breakdown: Are Stock Exchanges Dodging the Blame?

Stock Market


The Nasdaq OMX Group (NASDAQ:NDAQ), which operates the eponymous tech-heavy exchange, reported Thursday 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 across multiple exchanges. Specifically, there was a problem related to the exchange of information with Arca, the fully electronic exchange run by the New York Stock Exchange (NYSE:NYX).

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 this was not quite true, and 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 the Nasdaq itself, although they can be traded across 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 regulators are pressing the exchanges — specifically, the Nasdaq and the NYSE Arca — to come up with answers. There have been no interruptions in trading since the incident Thursday, suggesting that whatever the problem was, it has been resolved. But the enormous complexity of the exchange operations and an unwillingness to assume responsibility by both parties — a public relations nightmare — have clouded the issue.

Sources close to the matter have told Reuters that the Securities and Exchange Commission has asked the exchanges to come up with a timeline of events related to the outage, but that the operators disagree on exactly what happened. Both sides — which compete with each another — are eager to blame the other for the glitch, and both have reportedly suggested that the error first manifested on the other side of the fence.

Speaking on CNBC’s Squawk Box on Friday after the event, Nasdaq OMX Group Chief Executive Officer Robert Greifeld explained the freeze, saying, “We knew professional traders had access to individual data feeds, but the traditional long investor, retail investor now didn’t have the same information, because of that, we halted the market.”

This sort of information problem — where some investors or traders have privileged access to information and others do not — is one of the issues at the heart of the matter. In order for the market to operate effectively, all participants must have equitable access to the same information. Without it, the “fairness” that is a fundamental part of the market evaporates.

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