Nasdaq Error Shuts Options Market for Almost Entire Day

Photographer: Scott Eells/Bloomberg

Pedestrians pass in front of the Nasdaq MarketSite in New York. Close

Pedestrians pass in front of the Nasdaq MarketSite in New York.

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Photographer: Scott Eells/Bloomberg

Pedestrians pass in front of the Nasdaq MarketSite in New York.

Nasdaq OMX Group Inc. closed the sixth-largest U.S. options exchange more than five hours early because of a technical error, the latest malfunction to disrupt trading this week.

The Nasdaq Options Market, which handled 8.1 percent of American trading in September, was shut at 10:36 a.m. New York time and didn’t reopen because a “significant increase in order entries inhibited the system’s ability to accept orders and disseminate quotes” for some contracts, the company said. Trading continued on the 11 other U.S. venues, including two owned by New York-based Nasdaq.

The mishap followed others earlier in the week. An Oct. 30 malfunction interrupted data transmission at Deutsche Boerse AG (DB1)’s International Securities Exchange, while Nasdaq was unable to distribute prices for its benchmark stock indexes for almost an hour on Oct. 29. The breakdowns refocused concern that the distribution of trading over dozens of mostly automated venues has made U.S. securities markets fundamentally flawed.

“Any time you up the level of complexity, you up the risk of there being problems,” Christopher Rich, head options strategist at JonesTrading Institutional Services LLC, said in a phone interview from Chicago. “I don’t see that many advantages to having so many exchanges. It creates more opportunities for something to go wrong.”

The Nasdaq Options Market will open on Nov. 4, the company said.

August Outage

The company’s stock price dropped today following the disruption, slumping 0.4 percent to $35.30, as the Bloomberg World Exchanges Index of 27 bourse operators fell less than 0.1 percent.

Nasdaq has suffered several high-profile malfunctions, including its mishandling of Facebook Inc.’s initial public offering in May 2012 and an Aug. 22 outage in its pricing feed, which prompted a three-hour halt for thousands of U.S. stocks.

In the August incident, a flood of data sent by NYSE Euronext’s NYSE Arca stock exchange overwhelmed Nasdaq’s systems by exposing a design flaw. At one point, Nasdaq received over 2 1/2 times more data per second than the system’s tested capacity and about 26 times the average amount, according to the bourse.

Today’s breakdown was also triggered by Nasdaq’s computers being unable to handle the amount of information being sent their way. Nasdaq didn’t disclose who sent the data.

Market Fragmentation

The options market has seen other errors this year. CBOE Holdings Inc. (CBOE) delayed the opening of its main exchange for three hours in April, while Goldman Sachs Group Inc. executed erroneous orders on Aug. 20. The entire market was shut briefly on Sept. 16 because of a malfunction with the options industry’s main pricing feed.

Like the U.S. equity market, options trading is spread across multiple exchanges, all of them connected by data feeds that ensure buyers and sellers get the best available price. The fragmentation followed a decade and a half of reform on Wall Street aimed at spurring competition among securities exchanges.

Some investors have said the system breed so much complexity that avoiding breakdowns is impossible. Trevor Mottl, Susquehanna Financial Group LLLP’s New York-based head of derivatives strategy, said having multiple venues gives traders alternatives when one is unavailable.

“I’d argue that the increased number of exchanges where transactions can occur decreases the impact of issues like this,” Mottl wrote in an e-mail. “I expect that the impact would have been far greater 10 or more years ago.”

Securities and Exchange Commission Chairman Mary Jo White is pressuring exchanges to collaborate on making their systems more reliable. She met with executives from securities exchanges on Sept. 12 in Washington.

SEC spokesman John Nester said the regulator is speaking with Nasdaq about today’s malfunction.

“As is our practice we have been in close contact with Nasdaq and monitoring developments throughout the disruption,” Nester said in an e-mail.

To contact the reporters on this story: Sam Mamudi in New York at smamudi@bloomberg.net; Nikolaj Gammeltoft in New York at ngammeltoft@bloomberg.net

To contact the editors responsible for this story: Nick Baker at nbaker7@bloomberg.net; Lynn Thomasson at lthomasson@bloomberg.net

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