Nasdaq halt prompts SEC to renew call for scrutiny of electronic trading

Kevin G. Hall

A three-hour pause in trading Thursday on the Nasdaq stock exchange raised concerns anew about cyber security and whether technology is overwhelming financial markets and regulators.

Trading of all securities listed on the tech-heavy Nasdaq, where roughly 1.6 billion shares are traded daily, ground to a halt at 18 seconds past 12:20 p.m. EDT.

Trading remained frozen for more than three hours – affecting big-name stocks such as Apple, Microsoft and Facebook – resuming roughly a half-hour before the close of trading for the day.

In a statement more than five hours after the halt of trading, Nasdaq officials said a glitch in the system of quoting prices was the culprit and was resolved within half an hour. The rest of the delay, they suggested, was caused by the need to work with regulators and other stock exchanges to prepare for resumption of trading.

Later in the evening, officials described the problem as one of connectivity with an undisclosed market participant.

The Securities and Exchange Commission was mum for much of the day, but Thursday evening Chairman Mary Jo White issued a statement promising to gather Wall Street leaders and redouble her push for greater scrutiny of electronic trading.

“(The day’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,” she said.

White repeated a promise to push for new safeguards in electronic trading proposed by the SEC earlier this year. She also said she would convene a meeting of the exchanges and financial leaders “to accelerate ongoing efforts to further strengthen our markets.”The White House said Chief of Staff Denis McDonough briefed President Barack Obama during a bus tour of upstate New York.

McClatchy obtained access to a market system status report that Nasdaq provided to traders. It showed that Wall Street was alerted to problems at 11:45 a.m. EDT, more than half an hour before the actual halt in trading.

Nasdaq officials warned that momentary interruptions in the price-quoting system had occurred from 10:57 a.m. to 11:03 a.m. but had returned to normal. Then at 12:09 p.m., traders were advised of problems in submitting price quotes that flow between various stock exchanges and allow traders to know the actual real-time price of shares. Eleven minutes later, all trading stopped.

Initial fears were that a computer hacker had damaged Nasdaq systems. Then rumors swirled that it was a technical problem. By the dinner hour, neither had been proven nor discarded, although the Nasdaq’s reference to a glitch suggested technical issues.

The lack of clarity raised questions about whether the Nasdaq had enough redundancies in its electronic-trading system. That it happened at summer’s end on a day where trading was light was both fortunate and troubling.

“The functionality worries me a little bit because today was a very low volume day for a glitch to happen when the movement is not extreme,” said Scott Redler, chief strategic officer for T3 Trading in New York. “Imagine if there was a lot of movement, traders could be trapped in positions.”

The scant details also raised concerns about whether a role was played by high-frequency traders, who buy or dump massive volumes of stocks in milliseconds. They came to national attention during the “Flash Crash” on May 6, 2010, when the Dow Jones Industrial Average plunged 998.5 points, or almost 10 percent, before quickly recovering values.

Despite the halt, the Nasdaq managed to close up 38.92 points at 3638.71. The Dow rose 66.19 points to 14,963.74 and the S&P 500 climbed 14.16 points to 1656.96.

On Thursday, many asked whether the glitch was triggered by high-speed traders using computer algorithms looking for anomalies in trading patterns. Although an answer was elusive, the worry remained that markets have grown too complex and technical.

“We’re just seeing this happening on a repetitive basis. The market is not equipped to deal with the high speeds in which trading is done,” said Michael Greenberger, a former financial regulator and a University of Maryland law professor. “The trading needs to be slowed down, there needs to be evidence that there was human intervention before (computer) trades are made.”

By Kevin G. Hall
McClatchy Washington Bureau