A three-hour technical glitch that halted trading on Nasdaq on 22 August has again drawn attention to the US stock market’s potential weaknesses.
“Our systems, and the industry’s, have to get to a higher level of robustness,” said Robert Greifeld, chief executive (CEO) of Nasdaq parent Nasdaq OMX Group in an interview.
Commenting on the shutdown, Dr Arie Gozluklu, assistant professor of finance at Warwick Business School, said: “This is not the first time that trading on an exchange has suffered a technological problem and probably not the last time. There were other examples such as the Flash Crash in 2010, the Facebook initial public offering [IPO], while Goldman Sachs was hit by a bug and there was the Knight Capital case last year.
“There is speculation this is down to the number of high frequency traders, as algorithmic trading now makes up between 50% and 60% of trades in the US.
“Nasdaq could see its reputation harmed by this. Nowadays exchanges are profit-making organisations with the traditional big two of the New York Stock Exchange [NYSE] and Nasdaq facing competition from many alternative exchanges in the US. It could put off firms going public due to these types of liquidity problems which limit access to capital.
“Trust in the exchange is very important and the US Securities and Exchange Commission [SEC] are likely to push for more stringent rules to stop these system failures. There could be fines or penalties for technological problems, but it should also take into account other players in the game, not just the exchanges.”
More Hoops to Jump Through
Rik Turner, senior analyst, financial services technology at IT research and analysis firm Ovum agreed that a further tightening of rules could follow.
“From the industry’s perspective, the most ominous comment about [the problem] came from SEC chairwoman Mary Jo White, who said it should “reinforce our collective commitment to addressing technological vulnerabilities of exchanges and other market participants.” In other words, more safeguards will be put in place, which if nothing else are certain to cramp the industry’s style,” he said
“Now, of course, comment’s like Ms White’s are welcomed by all those who wish to see us avoid a global financial meltdown provoked by technology. After all, we all want to see Tokyo Electric Power Company taken to task over Fukushima, and we are all thankful that whatever computer systems that control the world’s missile systems – laughingly referred to as ‘missile defence systems’ – never have a mad half hour and nuke some unsuspecting city, aren’t we?
“Yet with the financial markets, there are vested interests against additional safeguards, for they mean additional cost and reduced flexibility, as firms have to jump through more hoops to comply with increasingly stringent regulatory requirements, and invest significant amounts to do so. Around 40% of investment banks’ IT budgets are currently devoted to compliance, for instance.
“Still, while the systems continue to fail in one way or another, regulators will continue to fret and, in consequence, to pass new rules in an effort to safeguard the system. Market participants, be they the buy side, sell side or trading venues, will just have to grin and bear it. And reach for their chequebooks…”
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