SEC reviews Nasdaq as rivals blame each other for outage

Regulators are questioning how robust Nasdaq OMX Group’s systems are after last week’s massive trading outage, while shrugging off a spat with NYSE Euronext as a distraction, a source familiar with the matter said. The US Securities and Exchange Commission has asked the rival exchange operators to come up with a blow-by-blow account of the trading disruption, but the two disagree on the details, other sources familiar with the situation said. Nearly a week after a glitch paralysed thousands of Nasdaq-listed stocks for three hours on Thursday on all US markets, Nasdaq and NYSE have different understandings of what happened, with each side blaming the other, these sources said. The blackout was preceded by connectivity problems between Arca, NYSE’s electronic platform, and the Nasdaq-operated Securities Information Processor (SIP). The SIP consolidates stock prices and distributes them to the market. It’s not clear is whether the problem at the SIP was caused by issues at Arca or technical flaws at the processor. “There’s a lot of finger pointing as to what caused the SIP to go down, but bottom line, the SIP really shouldn’t be going down,” the first source said about the SEC’s thinking, requesting not to be named in order to speak more freely. The SEC said on Tuesday that Chair Mary Jo White will meet with the heads of exchanges on Sept. 12 to address the glitch. The meeting in part will focus on ensuring SIP technology is robust enough, the first source said. “To the extent that the SIP was not operating with the highest degree of robustness in its technological standards, that’s something that needs to be focused on,” the source said. White has also pledged to move ahead aggressively with proposed reforms that would hold exchanges, clearing agencies and certain “dark pool” trading venues more accountable for preventing outages and other technical problems. The inability of the two largest US stock markets to come to a common understanding on what caused one of the worst market disruptions in recent memory underscores the complexity of the highly fragmented market and the difficulty of preventing future glitches. It could further damage investor confidence in markets, which have been roiled by a succession of high-profile technical glitches in recent years. Much is at stake for the two exchange operators. Nasdaq and NYSE have a lock on the US primary listings business and compete fiercely to woo companies to list on their respective markets. Major market debuts - Wall Street watchers have been tweeting about the possibility of a Twitter IPO for months - are huge public relations boons for exchanges. The exchange operators are also coming under more pressure from rivals. On Monday, BATS Global Markets and Direct Edge said they would merge, in a deal that would vault the new company ahead of Nasdaq in US stock trading. NYSE, which is being taken over by IntercontinentalExchange, is the No. 1 US stock exchange operator. The SEC has held several conference calls to get to the bottom of Thursday’s glitch, with White calling on Wall Street leaders to help ensure the “continuous and orderly” functioning of securities markets. The agency asked Nasdaq and NYSE to come up with a timeline of events during one such conference call over the weekend, and would prefer the exchange operators resolve the details together, the sources said. SEC spokesman John Nester declined to comment. Last week, Nasdaq Chief Executive Bob Greifeld told CNBC that the lesson to be learned from the outage was that the exchange needed to get better at “defensive driving” when dealing with other “market participants”. Sources close to Nasdaq said Greifeld was referring to Arca. Nasdaq believes Arca’s connectivity problems ultimately led to a freeze in the SIP, prompting the exchange to shut down the connection just before the processor froze, they said. Because of Arca’s repeated attempts to connect to the SIP, the processor’s memory reached capacity, its servers were overwhelmed, and it was unable to revert to backup systems. But people close to NYSE said while Arca had difficulties connecting to the SIP, such connection problems between exchanges are routine. So if the problem caused the SIP to shut down, it only exposed a flaw in Nasdaq’s systems, they said. NYSE believes that Arca’s connection was inadvertently shut down for 15 minutes by Nasdaq, and that it was back up and running for 45 minutes without a problem before Arca voluntarily shut it down at Nasdaq’s request, the sources said. “Whether Arca was the catalyst or someone else was the catalyst, it was a disaster waiting to happen,” said one person familiar with NYSE’s thinking. The outage is part of a series of high-profile trading glitches. On Monday, exchange operator Deutsche Boerse halted trading on its derivatives platform Eurex for an hour after technical problems. Also last week, a technical problem at Goldman Sachs resulted in a flood of erroneous orders in US equity options markets. And on August 6, BATS Global Markets faced an outage that lasted nearly an hour. And exchange operator CBOE Holdings has been hit with a number of problems that affected orders on its futures and options markets this week.