Nasdaq CEO focuses on ‘defensive driving’ after exchange outage

Nasdaq OMX Group Inc. halted trading for three hours yesterday to protect the integrity of markets as a technology malfunction left some investors without stock quotes, Chief Executive Officer Robert Greifeld said in his first public remarks since the incident.

The exchange operator was in constant communication with rivals during the outage and decided to halt trading of listed stocks to prevent “information asymmetry” among traders, Greifeld said in interviews at Nasdaq’s offices with Bloomberg Television’s Betty Liu and Andrew Ross Sorkin on CNBC. Greifeld said he supports developing a backup data feed to prevent the issue from happening again.

“The general theme we’re focused on going forward is that we have to improve our defensive driving ability,” Greifeld told Bloomberg TV. “This system has been around for 20 years, it works and it works remarkably well. Then things happen in the external environment that causes a problem.”

A faulty connection between the two biggest operators of U.S. stock exchanges brought half of the world’s largest equity market to a standstill, the second time this week U.S. trading was shaken by a computer malfunction.

Connectivity was disrupted between NYSE Arca, where about 11% of American share volume occurs, and the data processing subsidiary of Nasdaq Stock Market, home to 2,150 U.S. companies, according to a person with direct knowledge of the matter. That led Nasdaq to freeze thousands of stocks from Apple Inc. to Facebook Inc. that trade on about 50 markets from Kansas to New Jersey for more than three hours.

Resiliency, Robustness

“We have to make sure no matter what happens the system stays up and the system has a resiliency and a robustness that we did not exhibit yesterday,” Greifeld said on Bloomberg TV.

President Barack Obama was told about the malfunction and Mary Jo White, the chairman of the Securities and Exchange Commission, plans to convene market officials to discuss ways of making trading more reliable. Just three days ago, Goldman Sachs Group Inc., which made $5.8 billion from stock trading in 2012, flooded options markets with unintentional orders.

“For three hours not a single person in the world could trade any Nasdaq-listed stock,” Manoj Narang, the chief executive officer of Tradeworx Inc., a high-frequency trading firm in Red Bank, New Jersey, that designed a system to monitor markets for the SEC, said in a phone interview. “That’s not acceptable, especially for something as simple as a quote feed not working.”

Electronic Markets

The disruption is the latest to signal unreliability in electronic markets just as individual investors who withdrew from stocks after the global economic crisis have shown signs of embracing equities. About $30 billion poured into exchange- traded funds that own U.S. shares in July, the most since 2008 and the second-highest ever, according to data compiled by Bloomberg since 2000.

Failures are increasing as global markets get more fragmented. U.S. equity trading, which began on Wall Street more than two centuries ago and was dominated by the New York Stock Exchange for most of that period, has become dispersed among more than 50 electronic platforms accessible around the world.

It’s the latest challenge for Greifeld, the 56-year-old leader of Nasdaq OMX, which was criticized for mishandling the initial public offering of Facebook in May 2012. Nasdaq agreed to pay $10 million to settle SEC charges related to the IPO as regulators cited “poor systems and decision-making.”

Exchange Fragility

While Nasdaq’s closure yesterday kept brokers from executing client trades and raised fresh concerns about exchange fragility, investors praised the decision to stop activity before chaos snowballed.

Nasdaq’s own shares, which were covered by the halt, fell 3.4% to $30.46 in New York yesterday. That was the biggest drop in four months and trimmed the 2013 advance to 22%. The stock rose 0.6% at 10:58 a.m. in Frankfurt trading today.

The Nasdaq Composite Index, which didn’t move during the outage, gained 1.1% to 3,638.71 yesterday. The Nasdaq 100 Index of the biggest companies listed on the exchange climbed 1% to 3,101.82.

“It’s a good thing to halt the data before the trades go crazy because it could have easily turned into a flash crash,” said James Angel, a finance professor at Georgetown University in Washington. “It certainly doesn’t make them look good when their market went down but they pulled the switch before the market went crazy.”

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