Nasdaq Sees Fix for Exchange Breakdowns in Telephone Industry

U.S. stock exchanges should adopt the model used by telephone companies to ensure the resiliency of systems and stem a series of technology errors that have disrupted trading, according to Nasdaq OMX Group Inc. Chief Executive Officer Bob Greifeld.

The telecommunications industry has shared technology standards that each company uses, an attempt to ensure different systems can interact with each other without incident. Greifeld wants exchanges to do something similar.

“We’re spending time with the telco industry to see how they’ve done it and how they work,” he said today at an Investment Company Institute conference in New York. Exchanges will ultimately “look more like the telco industry.”

Greifeld’s company halted trading for thousands of U.S. stocks for three hours on Aug. 22 after a flood of data from NYSE Arca, a rival market, exposed a software flaw in Nasdaq’s conduit for disseminating prices. That prompted U.S. Securities and Exchange Commission Chairman Mary Jo White on Sept. 12 to order market operators to collaborate on avoiding malfunctions.

The deluge from NYSE Arca, a market owned by NYSE Euronext, “vastly exceeded” the capacity of a Nasdaq’s marketwide feed known as the securities information processor, “which caused its failure and then revealed a latent flaw in the SIP’s software code,” Nasdaq said in an Aug. 29 statement.

$20 Trillion

The disruption showed 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 trading systems. Standard & Poor’s said Sept. 19 the error at Nasdaq and other exchanges around the world could threaten industry credit ratings.

To ensure connections between exchanges are resilient, a standards body should sign off on the technology, Greifeld said today.

“The phone network is reliable because it has multiple hubs and pathways and only one standards body,” said Roger Entner, an telecommunications industry strategist with Recon Analytics LLC in Dedham, Massachusetts. “One hopes there are enough adults in the room to solve this, but if not, then you have to bring in a standards body.”

Nasdaq was to blame for some aspects of the Aug. 22 outage, while others highlight broader problems in the industry, the New York-based exchange operator said on Aug. 29.

‘Endemic’ Problems

For the problems caused by Nasdaq, “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,” Nasdaq said in August. “Other issues contributing to the halt are more endemic to technology issues across today’s complex markets and will require a broader industrywide 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, Nasdaq said.

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