On August 22, trading was halted on the Nasdaq OMX’s (NASDAQ:NDAQ) exchange in what is known in the industry as a “flash freeze.” The incident, which negligibly affected stock prices, served as a reminder to regulators and exchange operators of just how fragile the modern markets are given their dependence on intricate software systems. It was a problem with its software — the technology on which trading relies — that forced the Nasdaq exchange to go offline temporarily, a slightly ironic problem for an exchange home to many of the worlds biggest technology companies.
Nasdaq OMX “determined to halt trading on August 22 after the SIP [Securities Information Processor] could not process quotes thereby impacting the fair and orderly functioning of the public market,” read a Thursday press release explaining the trading halt.
The exchange operator’s review determined that “high frequency trading played no role in the technology events,” rather “the catalyst for the SIP failure was a confluence of unprecedented events that overwhelmed the processing capacity” of the Nasdaq system that reports prices of recent trades.
More specifically, a series of attempts by a market operated by NYSE Euronext (NYSE:NYX) to connect with the Securities Information Processor, the Nasdaq system that reports prices of recent trades, created a surge of data.
According to Nasdaq, just after 10 in the morning, the NYSE Euronext-owed Arca began having trouble connecting with the SIP and made more than 20 attempts to access the Nasdaq’s system. As sources familiar with the matter told The New York Times, the exchange operator’s system was not designed to “throttle,” or slow down, a flood of information like the one created by these numerous connection attempts.
Nasdaq eventually turned off Arca’s access to the system and just over an hour later, the system appeared to be working fine. But, the flood of data that had initially overwhelmed Nasdaq’s SIP forced the exchange to resort to backup servers, which then failed due to a flaw in the backup software. As a result, Nasdaq shut down the entire system at 12:14 p.m., sending traders notice that the market was halted complement. The problem was fixed within 30 minutes, but trading did not resume until 3:30 p.m.
Robert Greifeld, Nasdaq’s chief executive specifically told the Times in a telephone interview that he was not blaming Arca for the shutdown and he accepted responsibility for Nasdaq’s share of the problems. “They obviously had issues, and it caused an event,” Greifeld said, referring to the NYSE exchange. “We obviously had issues, we should be able to handle that. We were supposed to be able to fail over, and we did not,” he added.
He also noted that the stock market industry is facing a broad range of issues involving information security and data capacity.
The company “is deeply disappointed in the events of August 22 and our performance is unacceptable to our members, issuers, and the investing public,” stated the press release. “While getting to 100% performance in all of our activities, including our technology is difficult — it is our objective.”
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