Nasdaq CEO focuses on ‘defensive driving’ after exchange outage

‘Real Fear’

“The real fear is that we get stuck wearing some kind of risk because of an interruption that is not of our doing,” Max Breier, a senior equity derivatives trader at BMO Capital Markets Corp. in New York, said in a phone interview. “Any halt in information or ability to trade is going to hinder our ability to manage our risk and take positions.”

Obama was briefed on the disruption by his chief of staff, Denis McDonough, according to an e-mail from Josh Earnest, deputy White House press secretary, to reporters traveling with the president in upstate New York.

A meeting of exchange leaders will be convened in Washington to “accelerate ongoing efforts to further strengthen our markets” by the SEC’s White, according to a government statement.

The SEC and the Commodity Futures Trading Commission have stepped up scrutiny of trading since the so-called flash crash of May 6, 2010, when $862 billion in equity value was erased in 20 minutes before prices recovered. The CFTC, the top U.S. derivatives regulator, is poised to announce a range of potential methods for overseeing automated and high-frequency trading, according to four people with knowledge of the matter.

Direct Edge

The decision to freeze stocks halted dozens of other markets around the country that trade securities. Exchanges from Bats Global Markets Inc. in Lenexa, Kansas, to Jersey City, New Jersey-based Direct Edge Holdings LLC published notices saying they were following the main exchange.

Nasdaq “has to recommit to making sure they are delivering their core value proposition, which is reliable, transparent and effective market making,” Brad McMillan, chief investment officer for Waltham, Massachusetts-based Commonwealth Financial Network, said in a phone interview. His firm has more than $71 billion under management.

“If it gets to the point of, ‘Oh, yeah, Nasdaq went down again, and that’s not news,’ that’s when they lost their ability to deliver their core function.”

Volume Drops

The disruption resulted in the second-fewest shares changing hands on U.S. exchanges in at least five years during a full-day session. About 4.4 billion shares traded yesterday, 30% below the three-month average. Volume was lower only on Oct. 8, 2012, excluding holiday trading, according to data Bloomberg began compiling in 2008.

About 740 million exchange-listed shares changed hands during the three hours through 3:20 p.m. in New York following the suspension, or a third of the total transactions over the first three hours, data compiled by Bloomberg show.

American stock markets regularly shut down as share volume rose in the late 1960s before computers were in widespread use. According to the Depository Trust & Clearing Corp.’s website, exchanges closed every Wednesday and shortened trading hours as daily share volume of 10 million to 12 million shares meant “brokers were literally buried in paperwork.” Volume has averaged more than 6 billion shares a day in 2013.

Squirrel Shutdown

Yesterday’s outage was longer than an approximately 40-minute shutdown in 1994 that was triggered when a squirrel chewed through a power line in Shelton, Connecticut, disrupting electricity near a Nasdaq computer facility in Trumbull. That same year, a communications-software error shut the exchange for two-and-a-half hours. Another squirrel was to blame for a 1987 outage that lasted 82 minutes, according to a New York Times report at the time.

Investors in China were whipsawed by a computer malfunction last week. State-controlled brokerage Everbright Securities Co. reported a trading loss of 194 million yuan ($32 million) and apologized to investors after errors in order-execution systems on Aug. 16 sparked the biggest intraday swing in China’s benchmark index since 2009.

Yesterday’s halt “is not a Nasdaq issue, this is a much broader issue,” Sal Arnuk, a partner and co-founder at Themis Trading LLC in Chatham, New Jersey, said in a phone interview. “This is a black eye and an egg on the face of the structure of all the exchanges.”

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