Will Flash Freeze Give Investors Cold Feet?

In the wake of Thursday’s three-hour “flash freeze” that halted trading on the Nasdaq stock exchange, some investment strategists are questioning how the glitch will impact the average investor’s confidence in the market.

Trading was halted around 12:15pm ET Thursday and resumed around 3:25pm ET and the exchange, that houses tech heavyweights like Apple (NADAQ:AAPL), Microsoft (NASDAQ:MSFT) and Cisco (NASDAQ:CSCO), cited a UTP-SIP issue, which involves the system used to send out stock quotes to human traders.

Wall Street has been hit with several technology problems recently, that can weigh on investors’ confidence. On Tuesday, Goldman Sachs (NYSE:GS) sent out an erroneous options trades that briefly impacted the New York Stock Exchange. Last May, Facebook’s  (NASDAQ:FB) hotly-anticipated initial public offering on the Nasdaq was botched and left investors unsure of how much the paid for the social network site’s shares. Earlier in January 2010, the IPO of exchange operator BATS also suffered from technical troubles on its own exchange.

Disruptions in trading always make investors weary, says Bruce McCain, chief investment strategist at Key Private Bank, however it’s a blessing that this freeze occurred on a day that the markets were up.

“If this happened on a day when markets were down, and people are thinking about the desire to sell when they can’t sell, it would have a bigger impact on investor psyche,” McCain says. “Anytime you have these sorts of disruptions, it makes investors nervous, but it depends on how long it lasts.”

The non-reaction in the S&P 500 also supports the theory that both investors and traders accept the fragility of computer systems, he says. “There has been very little response in the S&P 500, so investors by and large realize that computers are fragile and that things can malfunction at times.”

But Sam Stovall, S&P Equity Research Chief Investment Strategist, says Thursday’s trading blackout is being over-hyped and that it’s a surprise this doesn’t happen more frequently given the volatility of modern technology.

“The media is making more of it than they should…. The last computer problem was the flash crash in May 2010—three years ago. Knowing how frequently business and personal computers crash, to hear of a stock exchange crash once every three years—I am surprised it doesn’t happen more often,” Stovall says.

McCain agreed with Stovall’s sentiment in regard to technical glitches in everyday activities, and says investors would be more deterred if there was a fairness aspect to the halt.

“For the most part, investors are not really traders,” he says. “They are not as concerned about closing out a position when they want to close it out. And nothing about this speaks to the fairness of the market. This is one of the inconveniences of modern life.”

And for those who are feeling lackluster or less confident due to the glitch, Stovall says, “there are other exchanges out there where investors can route their trades.”