When
Technology Interrupts Trading
Glitches,
“flash crashes” & other disturbances are becoming too numerous.
Provided by Jared Daniel of Wealth Guardian Group
“Why is this happening?” Those words were undoubtedly spoken on
Wall Street Thursday. Perhaps you uttered them, too. At 12:14pm EST, a glitch
halted all trading on the NASDAQ for more than three hours. During that
time, the New York Stock
Exchange suspended trading in all NASDAQ securities and scratched orders; NASDAQ
decided not to cancel any open orders on book.1,2
Reaction to the interruption was hot and swift. An exasperated
Dennis Gartman (publisher of The Gartman
Letter) called the snafu “an
embarrassment to the entire financial community” and likened it to the customer
service nightmares associated with multi-hour flight delays. “I’d rather have a
slower trade execution with data integrity than this kind of repeated
nonsense,” LandColt Capital LP managing partner Todd M. Schoenberger told FOX
Business.1,3
All in all, the Street coped pretty well with Thursday’s outage, another
side effect of high-speed, computer-driven trading. The NASDAQ wrapped up the
market day 39 points higher and the Dow and S&P 500 respectively gained 66
and 14 points. Still, the “flash freeze” marked another headache for
institutional and retail investors.1,4
Lately, those headaches have been more
numerous. We can’t forget the “flash
crash” of May 2010, which contributed to a 348-point single-day loss for the
DJIA. Last year brought the botched
Facebook and BATS IPOs (with shares severely hurt as a consequence) and the
software debacle that ruined the reputation of Knight Capital, a risk manager
that once handled orders from E-Trade and TD Ameritrade. It was taken over by
another firm this year after flirting with bankruptcy. Just this spring, the
Chicago Board Options Exchange lost a morning of activity due to a software
issue.2
The NASDAQ has been affected by some particularly weird hiccups. Remember
the stray squirrel incidents of 1987 and 1994? In each case, a small rodent in
suburban Connecticut triggered a power outage that disrupted a mighty New York
stock exchange.5
This time, it appears the NASDAQ’s legacy trading system was at fault. What
does “legacy” signify? Well, just like the NYSE, the NASDAQ uses trading system
software that is built on older versions of said software. So it must be
smoothly compatible with those older versions of the in-house application(s) and interface predictably with software
used by other exchanges and trading platforms. Each upgrade to legacy software
has the potential for a new wave of glitches. Shortly after noon on August 22,
NASDAQ’s Security Information Processor, or SIP, network went on the fritz –
and that is the network that dispenses quotes and trades. With its SIP out of
commission, NASDAQ had no way to distribute pricing to retail traders (and
everyone else).6
None of these recent interruptions have matched Black Monday – October
19, 1987, when runaway computerized trading helped the Dow drop nearly 22% in
one trading day – but they have market observers pleading for improved trading technologies.7
So how quickly can we put these problems
in the past? Don’t hold your breath.
The SEC has called for uniform technology standards for all U.S. financial
exchanges via its Reg SCI proposal, but that hasn’t gotten much traction. There
are 13 different exchanges out there now, and as the downturn hit Wall Street
with layoffs, exchanges and brokerages have comparatively fewer IT pros servicing
them than they once did.6
Decades ago, movies, TV shows and sci-fi novels repeatedly cautioned us
that no matter how wonderful computers were, they would never, ever, ever be
able to replace humanity. You could argue that this was the messaging of a more
innocent time, but the claim sounds as relevant as ever today, when Wall Street
endures moments of paralysis as mind-blowingly sophisticated technologies
rebel. Is there any way to preserve a human touch?
As Doreen Mogavero, CEO of Mogavero, Lee & Co. commented to FOX
Business, “The New York Stock Exchange has the right model. Human beings and
technology. The NYSE management has refused to give up the human element on the
floor for just this reason ... regulators have to begin to realize that the
pendulum has swung too far in the direction of machines and they need to
reevaluate the way they think of the market. They should follow the model that
the NYSE has created.”3
Patience is a virtue, and during these instances on Wall Street,
patience is certainly required. As Georgetown University finance professor
James Angel told the Associated Press Thursday, “I think people are [used] to
the fact that every once in a while the power goes out and a computer crashes. As
long as the trading is fair and orderly, I don't think that's going to deter
people from investing.”2
This material was prepared by MarketingLibrary.Net Inc., and does
not necessarily represent the views of the presenting party, nor their
affiliates. All information is believed to be from reliable sources; however we
make no representation as to its completeness or accuracy. Please note -
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service, and should not be relied upon as such. All indices are unmanaged and
are not illustrative of any particular investment.
Citations.
1 - tinyurl.com/l9ddwjt [8/22/13]
2 -
sltrib.com/sltrib/money/56769516-79/nasdaq-trading-technical-due.html.csp
[8/22/13]
3 - foxbusiness.com/investing/2013/08/22/traders-react-to-nasdaq-flash-freeze/
[8/22/13]
4 - cnbc.com [8/22/13]
5 -
blogs.wsj.com/moneybeat/2013/08/22/once-upon-a-time-it-was-a-squirrel-that-broke-nasdaq/
[8/22/13]
6 - tinyurl.com/keqg5pu [8/22/13]
7 - investopedia.com/terms/b/blackmonday.asp
[8/22/13]
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