Another Nasdaq malfunction shuts down options market


Nasdaq halted its second largest options market for much of November 1 after a spike in volume hampered the exchange's ability to accept orders and distribute quotes on some symbols, in the latest glitch to hit the market operator. (Brendan McDermid/Reuters)
November 1, 2013

Nasdaq suffered another trading debacle Friday, adding to a list of headaches that have plagued the exchange operator in recent months.

Nasdaq shut down trading on one of its three options markets for the most of the day Friday after its systems had problems processing a “significant increase” in orders and could not send out quotes for a subset of securities, the company said in a statement.

On Tuesday, Nasdaq cited human error for a 45-minute breakdown of the electronic feeds that value the indexes licensed by the exchange. As a result, some products — such as the options on exchange-traded funds — could not be traded.

The mishaps come after a software malfunction forced Nasdaq to halt trading for more than three hours on Aug. 22, a high-profile disruption that clobbered the exchange’s reputation. A week later, a similar technology glitch led the exchange to stop trading its stocks once more, but just for a few minutes.

The Securities and Exchange Commission, which is intensely scrutinizing the nation’s exchanges, has proposed that the companies abide by certain minimum technology testing standards, and SEC Chairman Mary Jo White has personally directed the heads of the exchanges to address market vulnerabilities.

The trading troubles have not been limited to Nasdaq. In September, software problems with a system administered by the New York Stock Exchange halted trading for 20 minutes on the nation’s options exchanges.

“Anything that makes headlines puts more pressure on the SEC to do something visible about exchange technology,” said James Angel, a Georgetown University professor. “The question is: Will the SEC do something intelligent or do something stupid?”

SEC spokesman John Nester said the agency is tracking the latest problem at Nasdaq and monitoring developments, in keeping with the agency’s usual practice.

Friday’s disruption affected just the Nasdaq Options Market, or NOM, which captures only about 12 percent of options trading. Trading continued on the 11 other U.S. options exchanges, so the event was not nearly as significant as the one on Aug. 22.

Although the NOM is not a dominant player in the options market, “this is a big deal in the sense that there’s another glitch,” said Joe Saluzzi, co-founder of the brokerage firm Themis Trading, “These are small tremors that are building and building, and eventually it will lead to a larger system outage.”

After the problems surfaced Friday morning, Nasdaq concluded that it was not critical for it to keep that options market running, said a person familiar with the matter who was not authorized to speak publicly. In a statement, the company said it was “in the best interest of market participants and investors to cancel all open orders on the NOM book at 10:36:57 a.m.”

Trading was shut down for the rest of the day.

Even though the NOM commands a small slice of the options trading, its failure has probably wreaked havoc on traders who were relying on it when the breakdown occurred, said Jon Najarian, co-founder of the online trading firm Trade Monster.

Many of those traders are in limbo, unsure whether the orders they’ve placed were executed, Najarian said. With prices changing constantly, some traders probably filled their orders elsewhere, and might discover that they’ve placed an order twice.

“That puts a brokerage firm at risk, because its customer has only a certain amount of money in an account,” Najarian said. “We’re at the mercy of the exchange.”

Dina ElBoghdady covers housing policy for The Washington Post.
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