Nasdaq CFO says complexity is obstacle to smooth-running markets

The complexity of U.S. stock-market structure is the “biggest obstacle” to ensuring systems run without failing, Nasdaq OMX Group Inc. Chief Financial Officer Lee Shavel said today.

Shavel said that the complicated nature of modern markets, together with competition between participants, makes it hard to achieve technological uniformity and create the certainty that would prevent outages such as the one that occurred on Aug. 22, when Nasdaq-listed stocks halted trading for three hours.

The outage was caused by a crash in the Nasdaq server that handles sending out price quotes. While the direct cause of the crash is unknown, Nasdaq said its system seems to have been overloaded by messages sent from the NYSE Arca exchange. U.S. stock trading is fragmented across more than 50 exchanges and alternative venues.

Industry discussions should result in “a compliance system that allows market participants and other exchange participants to have greater certainty in the types of situations that we’ll have to deal with and to make certain that we are anticipating as broadly as possible what may happen so that we’re prepared to address them quickly,” Shavel said at the Barclays Global Financial Services Conference in New York.

SEC Meeting

The outage led to a call by the Securities and Exchange Commission for the heads of U.S. exchanges to attend a private meeting in Washington on Thursday.

“The Commission is determined to enhance the safeguards necessary for strong market systems,” said SEC Chairman Mary Jo White when she announced the meeting on Aug. 22. “Today’s interruption in trading, while resolved before the end of the day, was nonetheless serious and should reinforce our collective commitment to addressing technological vulnerabilities of exchanges and other market participants.”

In his comments today, Shavel minimized the role that the technology breakdown played in the length of the halt.

“The delay in restarting trading was not a technology issue, it was driven by the fact that we wanted to make certain that all of the market participants, the exchange, the member firms were ready for that restart,” he said.

Nasdaq’s stock rose 1.1 percent to $31.01 as of 3:19 p.m. in New York today, still down 1.7 percent since the close on Aug. 21. Shares closed 3.4 percent lower after trading restarted on Aug. 22.

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