Trading in Nasdaq-listed stocks, including major companies such as Microsoft and Intel, halted for more than three hours Thursday after a technical glitch caused the exchange to shut down for most of the afternoon.
Nasdaq’s malfunction, coming on the heels of other recent technology mishaps on Wall Street, raised new questions about the stability of the vast machinery that makes modern stock trading possible. The once-simple act of buying and selling equity has turned into a web of software systems handling unprecedented levels of automation and complexity.
“Welcome to the world of electronic trading,” said Ted Weisberg, a longtime trader on the floor of the New York Stock Exchange. “How many times do we have to go through this before someone says this isn’t a very good system?”
Trouble first surfaced at 11:45 a.m. Eastern time, when Nasdaq said it was experiencing “momentary interruptions” in its ability to quote prices. Nasdaq blamed the glitch on trouble with the software that manages the price quotes for each stock in real time for all 13 exchanges in the United States.
At 12:14 p.m., an alert went out stating that all trading of Nasdaq-listed stocks had halted. Trading resumed about 3:30 p.m.
Nasdaq said the technical issues were resolved within 30 minutes. The rest of the time, Nasdaq said, was spent coordinating with other exchanges and regulators to ensure that when trading resumed, it would go smoothly.
Administration officials, including Treasury Secretary Jack Lew, closely monitored the breakdown Thursday. The Securities and Exchange Commission, which regulates the exchanges, said it would hold a meeting among market players to accelerate efforts to strengthen how the markets operate.
“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,” Mary Jo White, chairman of the Securities and Exchange Commission, said in a statement. “The Commission is determined to enhance the safeguards necessary for strong market systems.”
Thursday’s trading glitch could strengthen the case for tougher government oversight of electronic trading platforms, a move the industry has resisted. In March, the SEC proposed a regulation that would require exchanges to conduct coordinated trading exercises to test their ability to withstand disruptions.
The rule, called Regulation Systems Compliance and Integrity, would force firms to create procedures to make sure they can complete transactions without interruptions. The guidelines in place now are voluntary.
Industry groups have fought against the proposal, saying the compliance costs would be too much to bear.
In her statement Thursday, White said she would work to have the rule approved.
Many questions remained Thursday about why the software, known as the security information processor, or SIP, broke down.
There are thousands of stocks traded on Nasdaq, from small tech companiesto Microsoft and Apple. Because so much of the trading in the market is intertwined, there could be far-reaching implications for stocks traded on other exchanges, said equity trader Sal Arnuk, co-founder of Themis Trading.
“IBM is not traded on Nasdaq, but halting trading on Microsoft and Oracle may have an impact on IBM,” he said. “Trading everywhere screeched to a grinding halt.”
The world of stock trading has become faster and increasingly complex in recent years, undergirded by a huge amount of software.
“This is hundreds of developers working every day, changing code, putting it together and testing it,” said Lev Lesokhin, an executive vice president at CAST, a software analysis and measurement company. “The way that process is overseen and the construction and the quality of the construction is something that the industry really needs to catch up on.”
Unexpected snafus have become an almost regular occurrence.
In May 2010, the Dow Jones industrial average fell about 9 percent, or about 1,000 points, before jumping back up within minutes — an incident that became known as the “flash crash.”
BATS Global Markets, a U.S. equity exchange operator, had to cancel its initial public offering in March of last year after it encountered errors on its computers.
Facebook’s much anticipated initial public offering in May of last year ran into problems when Nasdaq’s technology couldn’t handle the high volume of trading. The SEC later charged Nasdaq with violating securities laws; the company agreed to settle by paying $10 million, the biggest fine ever levied against an exchange.
Some critics blame government regulations that have expanded the number of venues where trading can occur. Smaller firms that rely on automated trading have sprung up, and high-frequency trading now accounts for at least half of all trading activity on U.S. exchanges.
“Yes, we can trade faster,” Arnuk said. “Instead of trading at a tenth of a second, people can trade at a millionth of a second. What’s the downside? Well, you’ll have more of these issues.”
As trading hiccups become more common, investors may start moving to other venues, including private, lightly regulated platforms, said Brad McMillan, chief investment officer at Commonwealth Financial Network.
“To the extent that they start moving away, even incrementally, from the public markets, liquidity would be impacted, pricing could be impacted. That can negatively affect the average investor,” he said.
The average investor has mutual funds, most of which are run by large companies that can trade in a number of different ways, McMillan said. But “if pricing becomes less efficient and markets become less liquid, even mutual funds might be less able to execute those transactions.”
After the disruption Thursday, major U.S. stock indexes closed slightly up. The Nasdaq composite gained about 1 percent.