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Marketplace Morning Report

Nasdaq glitch: Why no backup?

Aug 23, 2013
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There were no show-stopping glitches in the stock market Friday. But everyone from day-traders to Securities and Exchange Commission officials were still scratching their heads about Thursday’s “flash freeze” on the Nasdaq Stock Exchange.

One puzzled expert was Michael Goldstein, chairman of the finance department at Babson College. “Why didn’t Nasdaq have a back-up?” he asked.

In many cases, it does. The U.S. has 13 stock exchanges. If one goes down, investors can go through the others. That is, only if they know the stock prices, and what failed Thursday was the system that tells everyone Nasdaq share prices.

“It’s kind of ridiculous,” says Joseph Saluzzi, co-founder of brokerage firm Themis Trading. “It’s a Rube Goldberg machine. Here we call it a fragment maze of destinations.”

The complexity of the exchange system makes it vulnerable, Saluzzi says, and as for a back-up, “As far as we know, that does not exist.”

Nasdaq CEO Robert Greifeld said Friday he agrees that U.S. markets should have a system that backs up stock quotes for all exchanges. 

Part of the problem, says Eric Hunsader, founder of market data provider Nanex, is that exchanges haven’t had the incentive to focus on back-up systems for price-sharing programs. That’s because the most lucrative traders don’t need them.  They’re so big they have their own.

“Exchanges cater to the high-frequency traders,” he says.

Nasdaq did not respond to a request for comment.

Investors and others are concerned that a single point of failure could close Nasdaq for three hours.

“This is a chokepoint, so you’d thing the chokepoint should have all the redundancy in the world,” says Charles Jones, a Columbia finance professor. Still, he says, no matter how much stock exchanges invest, “I don’t think we’ll ever get to 100 percent reliability.”

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