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Crisis of market confidence after Nasdaq shutdown

8:50 AM, Aug 23, 2013   |    comments
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Kevin McCoy, Matt Krantz and Kevin Johnson, USA TODAY

The world's second-largest stock exchange stopped dead for three hours Thursday, paralyzing trading in stocks with a combined value of more than $5.9 trillion, as an unexplained technical problem sparked a new crisis of confidence in U.S. financial markets.

The highly unusual flash freeze that crippled Nasdaq and blocked trading in Apple, Facebook and other popular stocks did not appear to have been caused by computer hacking, said a federal law enforcement official who did not want to be named because he was not authorized to speak publicly on the episode.

But traders and other finance industry workers nationwide and millions of other Americans monitoring via the Internet chattered with speculation, even as Nasdaq issued limited preliminary details about the shutdown's cause and a quickly launched investigation.

Though the market ended up for the day, the incident marked the latest in a series of high-profile embarrassments for U.S. exchanges. The shutdown followed Nasdaq problems with last year's bungled initial public offering of Facebook and the 2010 "Flash Crash" that sent the Dow Jones industrial average boomeranging down nearly 1,000 points and back up in minutes.

Mary Jo White, chair of the Securities and Exchange Commission, said that while the shutdown was resolved within hours, it "was nonetheless serious and should reinforce our collective commitment to addressing technological vulnerabilities of exchanges and other market participants."

The SEC earlier this year proposed new standards for trading. White said she would convene a meeting of leaders of exchanges and other major market participants "to accelerate ongoing efforts to further strengthen our markets."

Calling the shutdown "inexcusable," Thomas Peterffy, head of Interactive Brokers Group, a major online discount brokerage, questioned why a problem in one exchange froze trading in Nasdaq-listed stocks and options in other markets.

"The purpose of multiple exchanges is to have a more robust market system in which if any participant must go out, the system will continue to function," said Peterffy, who added that the shutdown "has a huge cost."

Yet other traders took the outage in stride. Gary Kaltbaum, president of money management firm Kaltbaum & Associates, called it "an outlier" event that would only worry traders if technological breakdowns occurred more frequently.

The glitch struck shortly after noon Eastern Time, when Nasdaq said it learned that stock quotes were not being disseminated by a system that distributes the prices for the finance industry. A connectivity issue between that system and a market participant was to blame, said the exchange, which ordered a halt in all Nasdaq-listed securities "to protect the integrity of the markets."

The technical problem was resolved within the first 30 minutes, Nasdaq said. Until the resumption of trading was announced at 3:41 p.m. ET, Nasdaq, other exchanges, market regulators and other participants scrambled to ensure an orderly reopening.

The rest of the trading day "finished in normal course," said the exchange. Nasdaq finished the day up just over 1% at 3638.71. But shares of Nasdaq's parent firm ended down more than 3.4% at $30.46.

Contributing: Adam Shell

 

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