Nasdaq Says Flaw Exposed in Data Flood Caused Trade Halt
Nasdaq OMX Group Inc. provided more details about its three-hour trading halt last week, saying a flood of data received from NYSE Arca exposed a software flaw in its conduit for disseminating prices.
The deluge “vastly exceeded” the capacity of a marketwide feed known as the securities industry processor, “which caused its failure and then revealed a latent flaw in the SIP’s software code,” Nasdaq said in a statement released today.
Today’s report amplifies previous public statements by Nasdaq about what led it to freeze trading in about 3,300 stocks both on its own platform and others where equities change hands in America. The disruption underscored how quickly the integrity of the U.S. market, which has a value of about $20 trillion, can be subverted as orders to buy and sell shares are matched on more than 50 exchanges and alternative electronic venues.
“Any piece of software, even if it’s run for 100 percent for 10 years, there’s still flaws in it,” Nasdaq CEO Robert Greifeld said in an interview with Bloomberg News. “Whatever you have, it’s a question of what unique set of circumstances happen to reveal that.”
Several of the issues that led to the halt were within Nasdaq’s control, the New York-based exchange operator said in the report.
“We are responsible for them, regret them, and intend to take all steps necessary to address them to enhance stability and functionality of the markets,” the report said.
It said, “Other issues contributing to the halt are more endemic to technology issues across today’s complex markets and will require a broader industry-wide effort to resolve.”
The malfunction began when NYSE Arca sent more than 20 “connect and disconnect sequences” as well as a stream of quotes for inaccurate stock symbols, according to Nasdaq’s summary. At one point, Nasdaq received over 2 1/2 times more data per second than the system’s tested capacity.
After being inundated with orders, the flaw in the SIP software prevented redundancy that is built into the system from “failing over cleanly” to a backup program, it said.
“That failover, that is our responsibility and our system did not handle that well,” Greifeld told Bloomberg News.
The report said a “combination of large system inputs and delayed outputs ultimately degraded the ability of the SIP system to process quotes to an extent that a shutdown of the system was in the broader public interest, to prevent information asymmetry and ensure fair conditions for all market participants.”
The shutdown was the latest in a series of failures to disrupt markets, prompting the Securities and Exchange Commission to push for rules requiring executives to boost the reliability of their technology. Faulty software caused Nasdaq’s mishandling of Facebook Inc.’s public debut last year.
In a separate message sent to clients today, Nasdaq said that it’s developing plans to better communicate with companies listed on its exchange and identify systems that need improvement after last week’s technical malfunction.
Nasdaq will be working with regulators, members of the exchange and partners to conduct a “thorough forensic analysis on what happened” and identify areas for improvement, the market operator told customers today. The message was sent by Bruce Aust, executive vice president of Nasdaq’s global corporate client group, and Robert McCooey, senior vice president of the global corporate client group, and obtained by Bloomberg News.
“It is clear that these systems could be more robust in their support of markets given the complex ecosystem in which we operate,” the client letter said. “We are reviewing additional enhancements and potential design changes to further strengthen the SIP resiliency,” it said, referring to the securities industry processor, which runs the data feed of stock prices that are sent to other exchanges and trading firms.
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