Nasdaq will no longer operate the technology that distributes price quotes of all Nasdaq-listed stocks to the public, after failing to gain support for a revamp of the glitchy software, which has disrupted markets and attracted scrutiny from regulators.
The price feeds to the public will not be interrupted, but the decision helps Nasdaq distance itself from any future trading mishaps tied to the software, which is collectively owned by a committee made up primarily of various exchanges.
Nasdaq has been trying to overhaul the technology since it malfunctioned five months ago and forced the exchange to halt trading for more than three hours. The high-profile meltdown clobbered the company’s reputation and caught the attention of the Securities and Exchange Commission, which has proposed that the nation’s exchanges abide by certain minimum technology-testing standards.
Feeling the heat, Nasdaq repeatedly asked the committee to swiftly approve 10 major upgrades for the technology. It detailed its recommendations in a Nov. 11 letter to the committee’s chairman, Tom Knorring, an executive at the Chicago Board Options Exchange.
In a Nov. 25 follow-up letter, reviewed by The Washington Post, Nasdaq informed the committee that it was ending its contract. The letter essentially serves as a two-year notice, a person familiar with the matter said. In the meantime, the committee will have to search for another company to run the system.
The letter suggests that Nasdaq felt cornered. Without the upgrades, it is “impossible” for Nasdaq to represent to the SEC or the public that the technology is “as resilient and robust as it can possibly be,” wrote Brian Hyndman, a senior vice president at Nasdaq OMX.
Knorring could not be reached for comment. Nasdaq declined to comment, as did the SEC.
The agency’s chairman, Mary Jo White, directed the heads of the exchanges to address market vulnerabilities after Nasdaq’s meltdown Aug. 22. Since then, other trading debacles tied to the software have erupted.
The technology at issue came about in response to the trading landscape that was dominated by the New York Stock Exchange, which, decades ago, was often accused of withholding price information from smaller competitors, according to market experts.
To level the playing field, a law was adopted that effectively forced the exchanges to pool their trading data and display the best prices for individual stocks. A company’s stock trades on many exchanges, and the idea was to aggregate all the bids and offers and provide an authoritative best price in one consolidated feed for all investors to see.
The aggregation is done by two securities information processors, or SIPs — the one administered by Nasdaq and another by the New York Stock Exchange. The technology has been a source of controversy for years, and many experts on market structure say it is an antiquated system struggling to keep up in a market dominated by high-speed traders.
They say that even when the technology is functioning properly, it is slow by today’s standards and inadvertently creates trading advantages for the market’s most sophisticated players.