Nasdaq CFO Says Complexity Is Obstacle to Smooth Markets

The complexity of the U.S. stock market poses the biggest challenge to ensuring systems run without failing, Nasdaq OMX Group Inc. Chief Financial Officer Lee Shavel said.

A six-year-old rule known as Reg NMS requires U.S. equity exchanges to route trades to the venue with the best price, a shift that spread trading across more than 50 markets. The underpinnings of that system were tested on Aug. 22 when Nasdaq halted trading for thousands of companies for three hours because of a glitch in its system for distributing price quotes.

“Given the number of connections within that system of various execution venues, and I think the competitive dynamics with which that environment has evolved within the Reg NMS context, it has created an environment that is inherently difficult to maintain consistency from a technology standpoint,” Shavel said today at a conference hosted by Barclays Plc in New York.

U.S. Securities and Exchange Commission Chairman Mary Jo White is meeting with exchange executives in two days to discuss Nasdaq’s Aug. 22 outage, which was caused by a flood of data sent from NYSE Arca that exposed a bug in Nasdaq’s software.

Shavel said today that industry discussions should result in “a compliance system that allows market participants and other exchange participants to have greater certainty in the types of situations that we’ll have to deal with and to make certain that we are anticipating as broadly as possible what may happen so that we’re prepared to address them quickly.”

SEC Meeting

When she announced the Sept. 12 meeting with exchanges, White said the Nasdaq outage “should reinforce our collective commitment to addressing technological vulnerabilities of exchanges and other market participants.”

In his comments today, Shavel minimized the role that the technology breakdown played in the length of the halt.

“The delay in restarting trading was not a technology issue, it was driven by the fact that we wanted to make certain that all of the market participants, the exchange, the member firms were ready,” he said.

Nasdaq shares rose 1 percent to $30.98 today, paring their decline since the day before the halt to 1.8 percent.

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