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After Nasdaq Shutdown, It's Time for Electronic Markets to Shape Up or Face Regulators

Nasdaq halted trading on Thursday

Photograph by Scott Eells/Bloomberg

Nasdaq halted trading on Thursday

Not a good week for electronic trading.

First, Goldman Sachs (GS) experienced a software glitch in its trading system on Wednesday that accidentally spammed exchanges with false stock options orders and could cost the firm upwards of $100 million. Today, Nasdaq (NDAQ)had to halt trading for three hours in thousands of listed stocks and options, including a bunch of popular tech stocks such as Apple (AAPL), Intel (INTC), and Facebook (FB).

We still don’t know the exact source of Nasdaq’s problem, but reports indicate that the exchange was having trouble printing data to the public tape. Which is as basic a function as there is for an exchange. Nasdaq, in a statement posted to its website, said trading would resume at 3:25 p.m. Once it did, the resumption was fairly smooth, to Nasdaq’s credit.

Nasdaq has historically been known as the more advanced, tech-savvy exchange, at least compared to the New York Stock Exchange (NYX). With the rise of BATS and Direct Edge over the last few years, that’s clearly no longer the case. After this glitch, plus the Facebook IPO debacle from 2012, Nasdaq’s credibility as a competent electronic exchange has taken a beating. A spokesman for Nasdaq didn’t immediately return a call seeking comment.

It’s not as the exchange has been getting crushed with huge order flow. It’s August, for Pete’s sake. Trading volumes have been trending below 6 billion shares a day recently, compared to daily volumes that often exceeded 10 billion back in 2008 and 2009.

These glitches provide red meat for those who think that computer-driven trading, particularly high-frequency trading, is inherently dangerous. It’s increasingly hard to argue with the critics as problems recur. High-frequency trading is already in steep retreat from its peak of a few years ago, and profits have collapsed. Stuff such as this only heightens the pressure.

Still, let’s remember: The good old days of open-outcry trading in the pits weren’t error-free. We just didn’t hear about errors that did occur because they were usually worked out by two guys in person. It’s also fair to say that electronic markets have amplified tiny errors into enormous ones as they cascade through digital channels, whether the fault belongs to an exchange or a trading firm. Like it or not, we live in an increasingly electronic, engineered world . To a certain extent, we have to live with it. The genie, as it were, can’t get put back in the bottle.

It could be made better—a lot better. The question is whether the industry takes the lead on correcting itself or leaves it for regulators to fix. My guess is that the trading firms would be better off fixing problems themselves than having the Securities and Exchange Commision come crashing in with some new regulatory regime. They’d better get moving. Fast.

Philips is an associate editor for Bloomberg Businessweek in Washington. Follow him on Twitter @matthewaphilips.

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