NYSE Euronext and Nasdaq OMX Group Inc., ordered by regulators to make U.S. equity markets more reliable, are considering improvements that include acting as each other’s backups on data feeds that disseminate prices, according to two people briefed on the matter.
Nasdaq’s system for publicly transmitting quotes malfunctioned on Aug. 22, halting trades for thousands of U.S. companies for three hours. In the aftermath, Securities and Exchange Commission Chairman Mary Jo White told market owners to collaborate on developing plans to prevent shutdowns.
Options under consideration by NYSE and Nasdaq include safeguarding each other’s securities information processors, or SIP, the feeds that both New York-based companies oversee to distribute trading information to investors, according to the people, who asked to not be named because the plans are private. Another possibility is asking Depository Trust & Clearing Corp. to run the backup systems, one of the people said.
“It’s important for both investor and public-company confidence that the national market system have some sort of failover, which requires cooperation between the two equity listing exchanges,” said Tim Quast, president of Denver-based ModernNetworks IR LLC. “In addition to a need for certainty that the market can continue to function properly during periods of intense trading and data volumes, the market-wide system of volatility pauses depends on the consolidated tape. So this is clearly good news in the short term, if only as a stop-gap solution.”
Because NYSE and Nasdaq run the exchanges where almost all U.S. companies list their stocks, a SIP shutdown can bring down the entire market even though transactions are now spread across more than 50 venues. During a Sept. 12 meeting with White, bourse operators discussed eliminating single points of failure, Gary Katz, the chief executive officer of Deutsche Boerse AG’s International Securities Exchange, said following the gathering.
Sara Rich, a spokeswoman for NYSE Euronext (NYX), and Nasdaq’s Rob Madden declined to comment.
The Wall Street Journal reported yesterday that the exchange owners were considering the backup plan.
Confidence in U.S. stock markets was shaken by the May 2010 rout known as the flash crash, when a single trade started a chain of events that erased about $862 billion in minutes from the value of U.S. stocks.
Concern intensified following a series of technical mishaps including Bats Global Markets Inc. withdrawing its initial public offering after the exchange operator couldn’t get its own stock trading, Nasdaq mishandling Facebook Inc.’s IPO, and NYSE calling off the closing auction for 216 stocks on Nov. 12 because of a computer outage.
Such breakdowns are putting the credit ratings of exchange operators around the world at risk for downgrades, Standard & Poor’s said Sept. 19.
The Aug. 22 malfunction at Nasdaq prompted White, the SEC chairman, to demand that U.S. exchanges develop “concrete measures designed to address specific areas where the robustness and resilience of market systems can be improved,” according to a statement from the regulator.
“Our homework assignments are clear, they require collaboration and we’ve got 60 days,” NYSE Euronext Chief Executive Officer Duncan Niederauer told reporters in Washington on Sept. 12 after the industry meeting with White.
The SIP is responsible for distributing stock price data to brokers, traders and media outlets. When Nasdaq’s system failed on Aug. 22, officials at the exchange decided to shut down all trading so investors who had alternative means of getting price data couldn’t exploit the situation.
In 1975, the SEC forced the exchanges -- the New York Stock Exchange, the American Stock Exchange, Nasdaq, and regional markets -- to combine their trading data and publish the latest prices at which stocks changed hands on one central data feed accessible to brokers and investors. The plan was to level the playing field so all market participants could see the best prices for every stock, no matter where it was listed.
As trading has become more automated, NYSE and Nasdaq have lost share to new venues including exchanges run by Bats and Direct Edge Holdings LLC. Even so, NYSE and Nasdaq remains responsible for disseminating market data to the public. The SEC lets exchanges charge brokers, money managers and media a fee for the information. That money is split among all the exchanges based roughly on their market share of total trading volume.
NYSE and Nasdaq also sell proprietary data feeds to high-speed traders. These conduits are faster and contain more data than the SIP, including all prices being offered, not just the best ones. While the law requires prices to be entered into the public and propriety feeds at the same time, the proprietary systems process and transmit the information more quickly.
To Charles Schwab Corp.’s Jeffrey Brown, it appears that NYSE and Nasdaq have neglected the public feed, making it more susceptible to breakdowns.
“There is no question they have underinvested” in the SIP, said Brown, a senior vice president at Schwab. As a discount brokerage, Schwab can’t afford to buy the proprietary feeds, which puts it at a disadvantage to sophisticated high-frequency traders, Brown said. The system is “flawed and degrades the data we can provide to our clients,” he said.
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