Nasdaq Warned Us About Its Leaky Plumbing

Jonathan Weil joined Bloomberg News as a columnist in 2007, and his columns on finance and accounting won Best in the Business awards from the Society of American Business Editors and Writers in 2009 and 2010.
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At Nasdaq OMX Group Inc., which operates the Nasdaq Stock Market, there are these things the company calls "systems issues" that crop up from time to time. The rest of the world calls them disasters. And today was a heck of an example, with the Nasdaq halting trading in stocks and options for much of the afternoon.

It's enough to make an investor want to short Nasdaq -- except that wasn't possible during the trading halt, because Nasdaq's stock trades on the Nasdaq. Another computer malfunction, we're told. Or maybe a squirrel chewed through the wrong wire somewhere. Nobody knows what happened yet, and the fat-finger excuse doesn't work anymore.

We will probably get some massive, impenetrable white paper of a report from the regulators a year or so from now, like the Securities and Exchange Commission did after the so-called flash crash of May 2010. And it will have lists of recommendations that will be outdated by the time it comes out. By which point there are bound to be more debacles. It's miraculous that trading halts like the one today don't undermine investors' confidence more.

Don't say Nasdaq didn't warn anyone, though. Here's a cluster of some of the risk factors from Nasdaq's most recent annual report. Note the first one, where the company said its systems issues were remedied after last year's fiasco when Facebook Inc. had its initial public offering.

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"We may experience losses and liabilities as a result of systems issues that arose during the Facebook, Inc. IPO."

"In connection with the IPO by Facebook on May 18, 2012, systems issues were experienced at the opening of trading of Facebook shares. Certain of our members may have been disadvantaged by such systems issues, which have subsequently been remedied."

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"System limitations or failures could harm our business."

"Our businesses depend on the integrity and performance of the computer and communications systems supporting them. If our systems cannot expand to cope with increased demand or otherwise fail to perform, we could experience unanticipated disruptions in service, slower response times and delays in the introduction of new products and services. These consequences could result in trade outages, lower trading volumes, financial losses, decreased customer service and satisfaction and regulatory sanctions. Our markets have experienced occasional systems failures and delays in the past and could experience future systems failures and delays."

"While we have programs in place to identify and minimize our exposure to vulnerabilities and work in collaboration with the technology industry to share corrective measures with our business partners, we cannot guarantee that such events will not occur in the future. Any system issue that causes an interruption in services, decreases the responsiveness of our services or otherwise affects our services could impair our reputation, damage our brand name and negatively impact our business, financial condition and operating results."

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"The success of our business depends on our ability to keep up with rapid technological and other competitive changes affecting our industry. Specifically, we must complete development of, successfully implement and maintain electronic trading platforms that have the functionality, performance, capacity, reliability and speed required by our business, as well as by our customers."

"The markets in which we compete are characterized by rapidly changing technology, evolving industry standards, frequent enhancements to existing products and services, the adoption of new services and products and changing customer demands. We may not be able to keep up with rapid technological and other competitive changes affecting our industry. For example, we must continue to enhance our electronic trading platforms to remain competitive, and our business will be negatively affected if our electronic trading platforms fail to function as expected. If we are unable to develop our electronic trading platforms to include other products and markets, or if our electronic trading platforms do not have the required functionality, performance, capacity, reliability and speed required by our business, as well as by our customers, we may not be able to compete successfully."

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There's a reason those are called risk factors. They can happen, and today they did. They will happen again.

This column does not necessarily reflect the opinion of Bloomberg View's editorial board or Bloomberg LP, its owners and investors.

To contact the author on this story:
Jonathan Weil at jweil16@bloomberg.net