Nasdaq froze transactions in all of its shares just after noon, stopping the buying and selling on its platform and dozens of others where the securities trade. Bad connectivity between an exchange that wasn’t identified and Nasdaq’s securities information processor, or SIP, led to a “degradation in the ability of the SIP to disseminate consolidated quotes and trades,” according to a Nasdaq release.
The exchange was NYSE Arca, according to the person with direct knowledge, who asked not to be identified because the matter is private. Rob Madden, a Nasdaq spokesman, declined to comment on the matter, as did Rich Adamonis, a spokesman for NYSE Euronext.
Nasdaq and NYSE, which almost all U.S. companies use to go public, each operate SIPs. The units receive quotes and trades from around the country and disseminate them in three groups, known as tapes. NYSE operates the Tapes A and B and Nasdaq runs Tape C.
“In order for the trade to be consummated, it has to hit the tape,” said Sayena Mostowfi, senior analyst at Tabb Group LLC based in New York. If it doesn’t, “you can’t really trade,” she said. “That’s why the entire market goes out.”
The Nasdaq SIP processed about 85.4 million quotes and 6.25 million trades per day in the fourth quarter of 2010, according to a consolidated exchange data report. NYSE’s handled 311.3 million quotes and 20.1 million trades daily in the same period. During peaks, Nasdaq saw an average of 58,585 quotes and 14,030 trades a second.
Nasdaq’s malfunction shows that not enough redundancy is built into the quote processing system, according to Jerome Dodson, president of San Francisco-based Parnassus Investments, which oversees about $9 billion. His firm submitted equity trades around noon New York time that weren’t completed.
“The traders said: ‘There’s nothing filling! There’s nothing filling!’” said Dodson, who oversees the Parnassus Fund that has beaten 93% of its peers in the past five years. “No doubt there should be a backup system.”
Signs of strain appeared shortly after 10 a.m. when NYSE Arca began alerting traders to problems, saying it was having issues routing orders in certain Nasdaq-listed securities, according to emails the exchange sent to subscribers. Although the exchange said it resolved the issue within about 10 minutes, live orders for those securities were canceled 20 minutes later and quoting didn’t resume until 11:16 a.m., status updates show.
About 30 minutes later, Nasdaq sent an alert that its SIP was having “momentary interruptions” disseminating quotes, and exchanges began halting Nasdaq-listed security data shortly after noon. NYSE Arca stopped at 12:14 p.m. at the request of Nasdaq, according to alerts.
Nasdaq equity indexes didn’t update during the outage and volume in stocks listed on the New York Stock Exchange also dwindled as liquidity dried up around the country. As happened after Goldman Sachs’s mishap, traders said losing access to so many stocks would expose trading positions to losses.