Not a good week for electronic trading.
First, Goldman Sachs (GS) experienced a software glitch in its trading system on Wednesday that accidentally spammed exchanges with false stock options orders and could cost the firm upwards of $100 million. Today, Nasdaq (NDAQ)had to halt trading for three hours in thousands of listed stocks and options, including a bunch of popular tech stocks such as Apple (AAPL), Intel (INTC), and Facebook (FB).
We still don’t know the exact source of Nasdaq’s problem, but reports indicate that the exchange was having trouble printing data to the public tape. Which is as basic a function as there is for an exchange. Nasdaq, in a statement posted to its website, said trading would resume at 3:25 p.m. Once it did, the resumption was fairly smooth, to Nasdaq’s credit.
The irony is rich since Nasdaq has historically been known as the more advanced, tech-savvy exchange, at least compared to the New York Stock Exchange (NYX). With the rise of BATS and Direct Edge over the last few years, that’s clearly no longer the case. After this glitch, plus the Facebook IPO debacle from 2012, Nasdaq’s credibility as a competent electronic exchange has taken a beating. A spokesman for Nasdaq didn’t immediately return a call seeking comment.
And it’s not like they’ve been getting crushed with huge order flow. It’s August, for Pete’s Sake. Trading volumes have been trending below 6 billion shares a day recently, compared to daily volumes that were often north of 10 million back in 2008 and 2009.
These glitches are more red meat for those who think that computer-driven trading, particularly high-frequency trading, is inherently dangerous. It’s increasingly hard to argue with the critics as problems keep occurring. HFT is already in steep retreat from its peak of a few years ago, and profits have collapsed. Stuff like this only heightens the pressure.
But let’s remember: The good old days of open-outcry trading in the pits weren’t quite error-free, we just didn’t hear about the errors that did occur as they were usually sussed out between two guys in person. It’s also fair to say that electronic markets have amplified tiny errors into enormous ones as they cascade through digital channels, whether it be on the exchange side or the fault of a trading firm. Like it or not, we live in an increasingly electronic, engineered world and to a certain extent we have to live with it. The genie, as it were, can’t get put back in the bottle.
But it can be made better, a lot better. The question is whether the industry takes the lead on correcting itself or leaves it up to regulators to fix. My guess is they’d be better off fixing the problems themselves than having the SEC come crashing down with some new regulatory regime. But they better get moving. Fast.
