Nasdaq Apologizes for Trading Disruption, Cites NYSE as Catalyst

"Nasdaq OMX is deeply disappointed in the events of August 22 and our performance is unacceptable to our members, issuers, and the investing public," the exchange admits in a statement posted on its website. "While getting to 100 percent performance in all of our activities, including our technology is difficult ─ it is our objective."

The report gives a run down of the series of events that led to the shut down of the Nasdaq, which occured when its Securities Information Processor (SIP) broke down, and market data dissemination was halted.

Interlinked Issues
Nasdaq squarely points the finger at NYSE Euronext, saying that its NYSE Arca exchange ─ formerly known as the Archipelago Exchange ─ began looping connection and disconnection requests at Nasdaq's sytems, eventually overloading the capacity of the SIP.

"On August 22, the SIP received more than 20 connect and disconnect sequences from NYSE Arca, each of which consumed significant resources," Nasdaq says. "Available capacity was further eroded as the SIP received a stream of quotes for inaccurate symbols from NYSE Arca, and generated quote rejects. Both of these actions served to degrade the system below the tested capacity of 10,000 messages per port, per second. During this period, NYSE Arca sent multiple bursts with each connect and disconnect, topping more than 26,000 quote updates per port, per second as it attempted to reconnect. By comparison, a typical August day for NYSE Arca would peak at less than 1000 messages per port, per second. The events of August 22 were 26 times greater than the average per port, per second activity."

This, the exchange says, revealed what it referred to as a "latent flaw" in its software code. This flaw prevented redundancy facilities from failing over, which in turn delayed system messages. The issue was so severe that Nasdaq, which, as an exchange, has a legal duty to operate an orderly market, made the call to halt trading. The feeds were re-established within 30 minutes, but testing and consultation were required before the market could re-open, requiring the extra time.

As the Securities Information Processor (SIP) for NASDAQ stocks, we are responsible for them, regret them, and intend to take all steps necessary to address them to enhance stability and functionality of the markets. - Nasdaq OMX

High-frequency trading (HFT), suggested by some commentators as being a cause after Nasdaq CEO Bob Greifeld made cryptic remarks about outside parties having a hand in the disruption soon after, had nothing to do with the glitch, the exchange said.

Alarmed
NYSE Euronext press officers in London declined to comment on Nasdaq's statements, instead referring inquiries to their colleagues in New York, which was out of office hours at the time of writing.

The shut down of Nasdaq's primary market came as the markets were rocked earlier in the week by a technology glitch at Goldman Sachs, which caused large numbers of erroneous buy orders to be sent into the US options markets. Given the proliferation of Nasdaq stocks on other markets such as bank-operated dark pools and internal crossing networks, as well as their use in complex basket products, and the pricing information used by other exchanges that comes from Nasdaq, the shut-down had a wider effect than simply halting trading in one place. President Obama, according to White House spokespeople, was briefed on the situation as it unfolded.

In addition to the Goldman Sachs error, trading was halted earlier in August on Direct Edge, the third-largest stock exchange in the US. Eurex, the derivatives market owned by Deutsche Borse, halted trading due to an unrelated glitch, while the Chicago Board Options Exchange (CBOE) also had a disruption due to data issues, leading to heightened concerns over the stability of technology in the US capital markets.

Mary Jo White, chair of the US Securities and Exchange Commission (SEC), announced that she would be convening a meeting of industry heads following the Nasdaq outage, scheduled for September 12. The US Commodity Futures Trading Commission (CFTC) is also holding a meeting of its Technology Advisory Committee on the same day, where it is expected to discuss HFT oversight.

The Bottom Line

• Nasdaq's disruption, according to the exchange, was due to its SIP being overloaded by requests from NYSE Arca.
• Despite this, the exchange accepts responsibility for the outage, which occurred on August 22.
• The feed was restored within 30 minutes, but further testing and consultation required more time to re-open trading.
• The SEC will convene a meeting on September 12 to discuss the technical issues that led to the market shut-down, among other areas of market infrastructure.