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August 23, 2013 12:13 am
At 12.15pm on a quiet summer Thursday in New York, the head of trading for one of the large banks that sits at the heart of US stock markets heard an unusual shout across the open floor: “Nasdaq has stopped trading!”
It was the first sign of what would turn out to be one of the worst disruptions to be suffered by a major US exchange. Nasdaq had closed for two days following the terrorist attacks of 9/11 and again after superstorm Sandy hit the US last year, but it had suffered few major incidents since a power outage caused by squirrels snacking on cables almost two decades ago.
Home to many of the largest companies in the US, the exchange raced to fix technical problems as it announced that trading would resume first at 2.45pm and then at 3.10pm.
By the time it restarted at 3.25pm Robert Greifeld, Nasdaq’s chief executive, had returned from holiday and Barack Obama, US president, had been briefed on the situation.
In those first minutes after Nasdaq went down, however, banks and brokers were simply trying to work out what had happened as trading continued, moving swiftly to other exchanges and alternate trading venues, including dark pools.
Concerns were raised over what would happen when the exchange eventually resumed trading, recalling another Nasdaq glitch that marred the first day of trading in Facebook’s shares last year.
“We all remember what happened when Facebook was halted then reopened, and we don’t want another rerun of that,” said a trader at a large bank while waiting for news of Nasdaq’s reopening. Jack Lew, Treasury secretary, happened to be visiting the Palo Alto campus of the social media company on Thursday, where he was briefed on Nasdaq’s trading halt.
The problem, at least initially, was with the “SIP”, the system that governs the collection, processing and distribution of market data. Sensing that price quotes to buy and sell stocks from the exchange had become outdated, or “stale”, computer systems at the banks initially sent orders to other trading systems that still functioned.
Nasdaq then called a halt to trading entirely, but ran into another problem: with SIP malfunctioning, it could not publicise the instructions in a way that computers could understand.
It was not until around 12.40pm that the message had spread across the market and trading in stocks and exchange-traded funds petered to an orderly halt. Once activity had ceased, desks immediately began to check through recent transactions to see if any orders had been filled at crazy prices.
In a sign that markets may be becoming more used to technical glitches, concern was largely professional, with few signs of panic. “You didn’t see any people slitting their wrists,” said one person who was on the trading floor of a big investment bank when Nasdaq announced the trading halt.
Some complaints were aired in public. Arthur Levitt, the former chairman of the Securities and Exchange Commission, said on Twitter that it was “unacceptable” that the exchange had failed to keep the market fully informed.
But James Angel, professor of finance at Georgetown University, said Nasdaq’s focus on reopening the market by testing one security first showed it had learned its lesson from the Facebook debacle in May last year. “It’s better to take your time and get it right rather than to rush it and get it wrong,” he said.
State Street and Vanguard said that ETFs which contain some Nasdaq stocks but are listed on a rival exchange, NYSE Arca, continued to trade but with wider spreads than normal. “All of the ETFs performed as expected,” said State Street.
While trading was stopped, banks also moved to cancel outstanding orders on their systems, receiving back confirmations known as “outs” that their orders had been killed.
These came back from all the trading venues except Nasdaq. One large bank said it was left with 7m shares outstanding, which it then had to go through line by line with Nasdaq staff to ensure that they were cancelled.
Nasdaq later said that trades struck between 12.14pm and 12.23pm would stand, in a decision which could not be appealed by market participants.
The cut-off point is “the thing that probably is going to be the source of most frustration today and into the next day or two,” said one trader at an investment bank. “The magic number was somehow 12.23pm. There’s a lot of confusion over why they came up with that number.”
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