Published August 22, 2013
Trading in all $5.65 trillion of Nasdaq-listed securities was halted for more than three hours on Thursday due to a technical glitch, representing the latest stark example of how complex equity markets have become.
After hours of confusion and several false starts, test trading resumed at about 2:45 p.m. ET and then in other securities at about 3:25 p.m.
The trading halt was announced to market participants through an alert sent by Nasdaq OMX Group (NDAQ) at about 12:15 p.m. ET.
“The market has become very complex. The plumbing is very ornate," said Sal Arnuk, co-author of Broken Markets and a partner at Themis Trading.
Nasdaq cited a UTP-SIP issue, which involves the system used to distribute stock quotes to human investors. In an update sent just before 1 p.m. ET, Nasdaq said it has implemented a “regulatory halt” for all Tape C securities “until further notice.” Tape C securities refer to securities that aren't primarily listed on either the New York Stock Exchange or Nasdaq.
Nasdaq said in a statement Thursday evening that "technical issues with the SIP were resolved" in the first 30 minutes, and that for the remainder of the time "NASDAQ OMX, other exchanges, regulators and market participants coordinated with each other to ensure an orderly re-opening of trading in NASDAQ-listed securities."
The statement also said that Nasdaq would be working with other exchanges that are members of the SIP to investigate the issue and pledged to "support any necessary steps to enhance the platform."
The electronic exchange stated it had identified the root of the issue and addressed it. Adding that "there was a connectivity issue between an exchange participant and the SIP, which lead to a degradation in the ability of the SIP to disseminate consolidated quotes and trades."
Shares of the New York-based exchange closed down 3.42% once trading resumed, while rival NYSE Euronext (NYX) jumped 1.50%.
“I think this was handled terribly on the part of Nasdaq. It seemed as if they didn’t really know how to respond to these events,” Harvey Pitt, former chairman of the SEC, told FOX Business. Nasdaq’s handling of the situation “left the markets in a state of complete disarray.”
Obama Briefed on Outage
“We will all know more of the details about exactly what caused today’s disruption but I am glad to say the markets are up and running," Treasury Secretary Jack Lew said from an event in California after U.S. markets closed.
Lew also said he sees no reason to "believe that today's incident has any of the more frightening aspects to it, but we're going to have to learn all of the facts."
The White House said President Obama was briefed by Chief of Staff Denis McDonough about the disruption.
U.S. stock-market officials and the Securities and Exchange Commission convened a conference call soon after the Nasdaq outage began, sources told FOX Business. The conference call continued as Nasdaq worked to fix the problem.
Thursday evening SEC Chair Mary Jo White issued a statement on the matter saying, "Today’s interruption in trading, while resolved before the end of the day, was nonetheless serious and should reinforce our collective commitment to addressing technological vulnerabilities of exchanges and other market participants. The Commission is determined to enhance the safeguards necessary for strong market systems. "
Further, White vowed to "convene a meeting of the leaders of the exchanges and other major market participants to accelerate ongoing efforts to further strengthen our markets."
The Nasdaq Composite had been stuck at 3631.17 since the trading halt began, but began moving at about 3:25 p.m.
Despite the frustration over the Nasdaq issues, U.S. markets remained in the green throughout the outage and closed solidly higher, with the S&P 500 ending up 0.86% to 1656.95.
"This is a big deal. I don’t think I’ve seen [a major halt] during the day in a long time," Dennis Dick, a market structure consultant and proprietary trader at Bright Trading in Detroit. "This market is so complex. Fifteen or 20 years ago it was so much simpler.”
“We are monitoring the situation and are in close contact with the exchanges,” John Nester, a spokesman from the Securities and Exchange Commission, told FOX Business.
A source said the House Financial Services Committee said the panel is "monitoring" the situation.
An FBI spokesman for the New York Field Office told FOX Business the agency is aware of the issue at the Nasdaq but has no further comment at this time.
The CME Group (CME), the owner of the Chicago Mercantile Exchange, said the Nasdaq outage has not had an impact on its markets.
'Nobody Knows Exactly What's Happening'
It's worth noting that many stocks were still trading on Wall Street as orders were routed away from Nasdaq.
The “Flash Freeze” did not appear to significantly impact NYSE trading volume. As of 1:30 p.m. ET, some 1.493 billion shares had changed hands in NYSE composite volume, which is about 12% below the exchange’s one-month average.
“I think people realized it’s a technology issue rather than a major news event or something that would create panic and dysfunction,” Christopher Nagy, former head of trading at TD Ameritrade (AMTD), told FOX Business.
But market participants did express confusion over the outage, with one senior official at a market-making firm saying: "Nobody knows exactly what's happening."
“It’s extremely irritating (for market participants) that trading isn’t happening now,” a source from a major U.S. investment bank told FOX Business.
The source also expressed doubt that Nasdaq-listed stocks were trading on so-called “dark pool,” pointing to a rule the exchange has prohibiting such trades when Nasdaq-listed securities aren’t changing hands.
The UTP SIP plan, which stands for unlisted trading privileges of securities of the securities information processor, governs the “collection, processing and distribution of all UTP SIP data,” according to UTPPlan.com.
With 2,448 listed stocks, Nasdaq is the No. 2 exchange in the U.S. behind NYSE and is heavily weighted in with technology stocks like Google (GOOG), Microsoft (MSFT) and Intel (INTC). The total market value of the Nasdaq Composite is $5.647 trillion, according to a Reuters calculation.
Nasdaq’s trading volume represents almost one-fifth of the entire market’s volume. According to data maintained by BATS Global Markets, Nasdaq’s “matched volume” market share as measured by month-to-date average trading volume is about 18%.
There didn’t appear to be any concrete evidence that the Nasdaq outage was caused by anything other than a technical glitch, but it’s no secret that financial exchanges represent the ultimate bulls-eye for activist hackers.
Are the Markets Too Complex?
Thursday’s trading halt comes amid a slew of glitches in the equity markets.
Earlier this week, an equity options unit of Goldman Sachs (GS) made a number of erroneous trades that caused problems across a number of exchanges.
The “Flash Freeze” nickname for Thursday’s plays off the May 2010 “Flash Crash,” the mysterious and scary selloff that sent the Dow Industrials plummeting 1,000 points in just minutes before they quickly recovered.
"Regulators have to begin to realize that the pendulum has swung too far in the direction of machines and they need to reevaluate the way they think of the market,” said Doreen Mogavero, president and CEO of Mogavero, Lee & Co.
Facebook’s (FB) May 2012 initial public offering was also marred by glitches on the Nasdaq that left investors in the dark for hours about what price they acquired the hot IPO at.
Somewhat ironically, the January 2013 the attempted IPO of exchange operator BATS was scuttled by technical glitches on its own exchange.
All of these incidents have reinforced concerns expressed by market structure experts about how complex the markets have become.
"We go through this charade every once in a while with the electronic market centers, yet, never hear about 'issues' when the humans get involved,"Todd Schoenberger, managing partner at LandColt Capital, wrote in an e-mail. "I'd rather have a slower trade execution with data integrity than this kind of repeated nonsense."
FOX Business reporters Rich Edson and Adam Samson contributed to this report.