Computer malfunctions shook American equity trading for the second time this week, freezing thousands of stocks listed on the Nasdaq Stock Market for three hours and raising fresh concerns about the fragility of exchanges.
The second-biggest American exchange operator, home to 3,200 companies from 37 countries, halted transactions in all of its securities shortly after noon, a decision that caused buying and selling to stop on its platform and dozens of others where the securities trade. Errors in the feed used to disseminate quotes and prices were to blame, Nasdaq said on its website.
Many of the country’s most-traded shares, from Apple Inc. (AAPL) to Intel Corp. and Facebook Inc., ground to a virtual standstill as brokers were unable to execute customer orders. Nasdaq equity indexes didn’t update during the outage and volume in stocks listed on the rival New YorkStock Exchange also dwindled as liquidity dried up around the country.
“The real fear is that we get stuck wearing some kind of risk because of an interruption that is not of our doing,” Max Breier, a senior equity derivatives trader at BMO Capital Markets Corp. in New York, said in a phone interview. “Any halt in information or ability to trade is going to hinder our ability to manage our risk and take positions.”
Afternoon Resumption
Shares covered by the halt began to change hands again at about 3:25 p.m. in New York. Nasdaq let stand transactions executed between 12:14 p.m. and 12:23 p.m. Open orders were not automatically canceled and customers were told they could cancel them voluntarily before trading resumed, the exchange company said on its website.
President Barack Obama was briefed on the disruption this afternoon by his chief of staff,Denis McDonough, Josh Earnest, deputy White House press secretary, said in an e-mail to reporters traveling with the president in upstate New York. The Securities and Exchange Commission was also monitoring the situation.
U.S. Treasury Secretary Jacob J. Lew saw no reason to believe the halt had “any of the more frightening aspects to it, but we’re going to have to learn all the facts.” He was questioned about the shutdown by a moderator today after a speech in Mountain View, California.
The disruption, just two days after options markets were roiled by mistaken trades sent by Goldman Sachs Group Inc., is the latest in a series of computer malfunctions that have raised questions about the reliability of electronic markets. Nasdaq faced criticism last year when it mishandled the public debut of Facebook, causing losses for its member firms.
Another Headache
Though the cause was unclear, the outage is more bad news for Robert Greifeld, the Nasdaq chief executive officer whose reputation suffered following the Facebook IPO. Company representatives didn’t respond to e-mails and phone calls asking what triggered the breakdown.
“This is just another one of those headaches that are going on with this electronic stuff,”Frank Ingarra, head trader at Greenwich, Connecticut-based NorthCoast Asset Management LLC, said in a phone interview.
The action froze stocks both on Nasdaq’s platforms and dozens of other markets around the country that trade securities it lists. Exchanges from Bats Global Markets Inc. in Lenexa,Kansas, to Jersey City, New Jersey-based Direct Edge Holdings published notices saying they were adopting Nasdaq’s halt.
Lower Volume
The disruption resulted in the second-fewest number of shares changing hands on U.S. exchanges in at least five years during a full-day session. About 4.4 billion shares tradedtoday, 30 percent below the three-month average. Volume was lower only on Oct. 8, 2012, excluding holiday trading, according to data Bloomberg began compiling in 2008.
About 740 million exchange-listed shares changed hands during the three hours through 3:20 p.m. in New York following the suspension, or a third of the total transactions over the first three hours today, data compiled by Bloomberg show.
Nasdaq’s own shares, which were covered by the halt, fell 3.4 percent to $30.46 at the 4 p.m. close in New York. They’re up 22 percent in 2013. The Nasdaq Composite Index (CCMP), which didn’t move during the outage, gained 1.1 percent to 3,638.71, while the Nasdaq 100 climbed 1 percent to 3,101.82.
The Dow Jones Industrial Average (INDU), which includes Nasdaq-listed Microsoft Corp. and Cisco Systems Inc., was calculated throughout the day using the shares’ last price. It gained 0.4 percent to 14,963.74. Among Nasdaq stocks, Apple increased 0.1 percent to $502.96 and Intel added 0.4 percent to $22.26.
‘Big Deal’
“It’s a big deal for the Nasdaq, but it wasn’t as impactful on the market as you would expect,”Douglas Kass, the founder of Palm Beach, Florida-based Seabreeze Partners Management Inc., said in a phone interview. “There’ll be some residual loss of confidence on the part of retail investors, but beyond that I don’t think it’ll have impact.”
Trading failures are multiplying as global financial markets get more complex. U.S. equity trading, which began on Wall Street more than two centuries ago and was dominated by the New York Stock Exchange for most of that period, has become dispersed among more than 50 computerized platforms accessible around the world.
Individual investors have showed signs of embracing equities this year. Almost $95 billion was poured into exchange-traded funds that own American shares this year, while a measure of historical price swings indicates the U.S. market is the calmest in more than six years compared with shares from China, Brazil, India and Russia.
Flight Risk
“A trading halt is pretty big on a major public market,” Douglas Cote, chief market strategist at ING U.S. Investment Management in New York, said in a telephone interview. His firm oversees $190 billion. “It’s kind of like being in an airplane. It’s risky. Even though planes have had some problems, you don’t not fly because of it.”
Signs of strain appeared earlier when NYSE’s Arca canceled orders for Nasdaq shares and other exchanges routed trades away from the electronic platform through a procedure known as self-help. Just before 12:30 p.m., shares of Yahoo! Inc. briefly plunged more than a dollar over about a dozen trades. Intel surged 20 cents or more in a handful of transactions.
“We are monitoring the situation and are in close contact with the exchanges,” SEC spokesman John Nester said.
Sean Oblack, a spokesman for Senate Banking Committee Chairman Tim Johnson, said in an e-mail statement that the panel’s staff “has been following the issues, is in contact with the SEC and will continue to monitor additional developments.”
Hungry Squirrels
American stock markets regularly shut down as share volume rose in the late 1960s before computers were in widespread use. According to the Depository Trust & Clearing Corp.’s website, exchanges closed every Wednesday and shortened trading hours as daily share volume of 10 million to 12 million shares meant ’’brokers were literally buried in paperwork.’’
Today’s outage was worse than an approximately 40-minute shutdown in 1994 that was triggered when a squirrel chewed through a power line in Shelton, Conn., disrupting electricity near a Nasdaq computer facility in Trumbull. That same year, a communications-software error shut the exchange for two-and-a-half hours. Another squirrel was to blame for a 1987 outage that last 82 minutes, according to a New York Times report at the time.
Options markets were bombarded with erroneous orders two days ago when an internal computer at Goldman Sachs malfunctioned. Options officials at Nasdaq as well as NYSE Amex and CBOE Holdings spent almost a day reviewing orders for cancellation.
China Error
Investors in China were whipsawed by a computer malfunction last week. State-controlled brokerage Everbright Securities Co. reported a trading loss of 194 million yuan ($32 million) and apologized to investors after errors in order-execution systems on Aug. 16 sparked the biggest intraday swing in China’s benchmark index since 2009. The incident touched off a 53 percent surge in volume in the Shanghai Composite Index, which jumped from a loss of as much as 1 percent to a gain of 5.6 percent in two minutes. Xu Haoming resigned as president of the firm four days after regulators announced a probe.
In May, Nasdaq agreed to pay $10 million to settle SEC charges related to the initial public offering of Facebook. Regulators cited it for its “poor systems and decision-making” during the IPO in May 2012 that was delayed when software that collects orders fell into a loop. Nasdaq agreed to the settlement without admitting or denying the SEC’s findings.
Facebook Fine
The SEC penalty was imposed because Nasdaq failed in its obligation to ensure that systems, processes and contingency planning are robust and adequate to manage an IPO without disruption to the market, the agency said.
Legislation that created the SEC in 1934 also deemed the main venues self-regulatory organizations, or SROs, overseeing their member firms and trading. Critics said the Facebook mishap shows how changes in the structure of markets have made old regulations obsolete and that firms such as Nasdaq should be regulated like any other for-profit company.
Exchanges have close to absolute legal protection for actions taken as part of their regulatory duties. The doctrine arose when exchanges were not-for-profit organizations owned by their member firms. The shield protects them from lawsuits related to the exercise of powers delegated by the SEC and prevents financial losses that could jeopardize institutions seen as vital to the U.S. economy.
