Trading of over-the-counter stocks was halted for 3 1/2 hours today in the U.S. after a network failure disrupted one of the main venues, prompting regulators to order a complete shutdown.
Transactions were stopped at 11:25 a.m. New York time because of a “lack of current quotation information,” the Financial Industry Regulatory Authority said in a statement. OTC Markets Group Inc. resumed trading at 3 p.m., recovering from a disruption at one of its network service providers, Chief Executive Officer Cromwell Coulson said.
The shutdown happened on one of the biggest trading sessions this year as Twitter Inc.’s shares debuted. The disruption only paused equities such as Fannie Mae and Freddie Mac, not the more significant companies listed by NYSE Euronext or Nasdaq OMX Group Inc. (NDAQ) Still, it tested investors’ nerves following a series of technical mishaps since August that have boosted concern that the infrastructure of American securities markets is unreliable.
“Obviously it’s not as large of an issue as it would be if it occurred on Nasdaq or NYSE, but it’s problematic nonetheless,” said Mark Turner, head of U.S. sales trading at New York-based Instinet Inc.
Companies whose shares trade over the counter make up a small fraction of total American transactions. Yesterday, the value of trades was about $1 billion, compared with $227 billion for stocks listed on the NYSE or Nasdaq, according to data compiled by Bloomberg.
The pause was the latest mishap to freeze part of the U.S. equity market, including a three-hour halt for thousands of stocks on Aug. 22 because of a computer error at Nasdaq. The entire options market was halted briefly on Sept. 16 because of a malfunction at an NYSE Euronext (NYX) division.
Coulson said he was unhappy that OTC Markets couldn’t handle today’s breakdown.
The OTC Markets network service provider “had troubles, but it’s our fault for not having the diversity we need,” Coulson said during a conference call with journalists. “Many of our customers who came in through our other providers were all good, and the problem was getting that critical mass of diversity for our broker-dealer community.”
Coulson said Twitter’s initial public offering complicated efforts to resolve today’s malfunction. OTC Market was ready to switch to a backup site outside Philadelphia, but some brokers didn’t want to shift while they were waiting for Twitter to start trading. The social-media company opened on the New York Stock Exchange at 10:49 a.m. New York time.
OTC Markets, which hosts trading in more than 10,000 over-the-counter securities, began experiencing connectivity issues at about 6 a.m. New York time, Coulson said. The troubles affected quotes and trade messages, said Saskia Sidenfaden, a company spokeswoman.
Throughout the morning, broker-dealers told Finra that they were having trouble trading over-the-counter equities, Steven Joachim, executive vice president at Finra, said during a phone interview.
“We decided that in order to ensure that investors could trade with confidence and that the prices they were getting were fair and equitable, it was best for us to halt the market,” he said.
The decision was taken after discussions with the U.S. Securities and Exchange Commission, Joachim said. Finra will analyze today’s events to see if any changes are needed.
“We will do a very careful review, with the Commission, of all the activities and our comfort level with how the market structure operated for OTC equities,” he said. The regulator will “decide whether there’s some actions that should be taken,” he said.