The Nasdaq Stock Market won’t tinker with the software that runs its daily closing auctions after all, deciding that any benefit from preventing a rare problem were overshadowed by the potential risks from doing something.
Nasdaq said in December that it planned to change how the crucial process for setting end-of-day prices works, aiming to prevent anyone from sending orders that sway the closing price once the clock strikes 4 p.m. in New York. The auction usually finishes within a second after 4 p.m., and without that restriction, fleet-footed traders can in theory move prices in those final moments.
The exchange subsequently decided making an adjustment wasn’t worth it. Despite having figured out how to adjust its software, the unit of Nasdaq OMX Group Inc. said “even successful solutions to difficult challenges can create unforeseen risks,” according to a Securities and Exchange Commission filing dated June 26.
The dangers of upending the status quo were underscored on July 8 when a software upgrade at the New York Stock Exchange went bad, causing a more than three-hour shutdown of the market.
The world’s biggest investors rely on closing stock prices -- which are set in the U.S. by auctions at Nasdaq and NYSE Group’s markets -- to gauge their own performance. That makes this information a critical part of the market and raises the stakes for ensuring the data is a true reflection of trading. If an errant order slips through in the second or so between 4 p.m. and the end of Nasdaq’s auction, that could be undermined.
Nasdaq acknowledged such problems are rare. It described its now-canceled plan as being intended to “avoid a potential risk, albeit slight, that the closing price of a security may be significantly altered by an aberrant order in a security due to an error,” according to its SEC filing.