Nasdaq breakdown puts pressure on crisis work

Activity at the Nasdaq stock exchange returned to normal on Friday.
Andrew Kelly/reuters
Activity at the Nasdaq stock exchange returned to normal on Friday.

WASHINGTON — The latest high-tech disruption in the financial markets increases the pressure on Nasdaq and other electronic exchanges to take steps to avoid future breakdowns and manage them better if they do occur.

The three-hour trading outage on the Nasdaq stock exchange Thursday also can be expected to trigger new rounds of regulatory scrutiny on computer-driven trading.

The exchange returned to normal Friday.


Thursday’s outage ‘‘puts a lot more wind in the sails’’ of regulators’ actions, said James Cox, a Duke University law professor and expert on the Securities and Exchange Commission.

Get Talking Points in your inbox:
An afternoon recap of the day’s most important business news, delivered weekdays.
Thank you for signing up! Sign up for more newsletters here

The SEC plans to finalize rules that would put stricter oversight on exchanges, requiring them to routinely test trading systems, for example. And the Commodity Futures Trading Commission is moving toward reining in high-speed trading.

For Nasdaq, the apparent system failure brings ‘‘a gigantic reputation loss,’’ Cox said. ‘‘Three hours without a market: That’s crazy.’’

The SEC could end up fining Nasdaq, and the exchange might be put under supervision by an outside monitor, Cox suggested.

Questions about potential dangers of super-fast electronic trading systems that now dominate US stock markets rippled again through Wall Street and Washington. Trading now relies on computer systems that exploit split-penny price differences. Stocks can be traded in fractions of a second, often by automated programs. That makes markets more vulnerable to technical failures.


The CFTC expects to put forward next week possible new restrictions on high-speed trading, two people with knowledge of the matter said Friday. They said it was a first step, presenting possible options for new regulations to spark debate.

Nasdaq-OMX chief executive Robert Greifeld told CNBC on Friday that unspecified, external factors caused the glitch, and that the exchange followed all the proper procedures to correct the problem.

“We’re deeply disappointed with what happened yesterday,” he said. “We aspire to perfection.’’

The shutdown appeared to occur in an orderly fashion and didn’t upset other parts of the stock market. While hardly as stunning as the ‘‘flash crash’’ that set off a steep and sudden plunge in May 2010, the Nasdaq disruption some are dubbing the ‘‘flash freeze’’ did stir memories of it.

After the 2010 market break, regulators ‘‘never really developed a fix for it, and these kinds of things are going to continue to happen,’’ said Michael Greenberger, a law professor at the University of Maryland who was the top market oversight official at the CFTC in the late 1990s.


Regulators need to slow down automated trading by requiring trades to be placed ‘‘with human input,’’ he said.

On Thursday, only a few hours after trading ended for the day, the head of the Securities and Exchange Commission said she will work to finalize SEC rules that would subject US exchanges to tighter oversight of automated trading.

‘‘Today’s interruption in trading, while resolved before the end of the day, was nonetheless serious and should reinforce our collective commitment to addressing technological vulnerabilities of exchanges and other market participants,’’ SEC Chairman Mary Jo White said.

The actions Nasdaq takes, or should take, will be closely watched. Those range from improved testing and backup of its systems to ramping up its crisis management and communicating more clearly with the investing public.

The Nasdaq exchange was born of technology and is dominated by the biggest names in the field like Microsoft, Apple and Google. Thursday’s breakdown followed a series of tech-rooted disasters involving various exchanges. They included Facebook’s bungled public offering launch on Nasdaq in May 2012, one of the largest IPOs in history. The SEC later fined Nasdaq $10 million for that disruption — the largest penalty it ever imposed on an exchange.