The New York Stock Exchange and Nasdaq Stock Market agreed to back each other up during malfunctions that hinder their daily closing auctions, enhancing safeguards for a critical part of the $25 trillion U.S. stock market.
If either company can’t establish closing prices for the stocks they list, the other will calculate the information, according to a statement from the exchanges Wednesday. The plan needs Securities and Exchange Commission approval.
The world’s biggest investors tap into these auctions to do much of their trading, so a breakdown can have wide implications. NYSE’s closing auction came under scrutiny on July 8, when an outage at the exchange raised the possibility that day’s closing auction was imperiled. Two days later, a Bloomberg article highlighted the risk from there not being a backup plan in place.
“The role the closing auction plays in establishing reliable closing prices and facilitating liquidity is recognized by market participants and regulators alike,” Tom Farley, NYSE Group’s president, said in the statement. “We look forward to working with the industry and the SEC to implement this resiliency plan for the public markets on behalf of investors.”
NYSE and Nasdaq compete for market share in U.S. equities, but agreed collaboration in this case was best, Nasdaq OMX Group Inc. Chief Executive Officer Robert Greifeld said. The NYSE incident on July 8 accelerated the discussions, he said.
“Our agreement with NYSE now to back each other up brings further resiliency to the equity market,” Greifeld said during a Bloomberg Television interview Thursday. “Investors should be encouraged by that.”
The deal won praise from the Securities Industry and Financial Markets Association, which represents Wall Street brokers, banks and investors.
“By backstopping each other’s closing auctions, the exchanges will help provide needed certainty that official closing prices can be established in the event that one of the exchanges cannot operate its closing auction,” according to Sifma.