Time was it took a war to close a financial exchange. Now all it needs is a glitch in technology. On August 26 trading on Eurex, the main German derivatives exchange, opened as usual; 20 minutes later it shut down for about an hour. Four days earlier the shares of every company listed on NASDAQ, a U.S. stock exchange, ceased trading for three hours. The direct impact of these computer crashes was small. But, given that global markets and financial firms are all hooked up through complex trading programs, the indirect impact could be significant.
In these two cases there was no news of big losses. So there was no panic. All concerned also appear to be making a genuine effort to understand and disclose what went wrong. NASDAQ’s reputation and revenues are still suffering from the disastrous public offering of Facebook in May 2012, when computer glitches produced an estimated $500 million worth of errant trades. Knight Capital, a securities firm, never recovered from a $460 million trading glitch last year. On August 20 a flurry of misdirected trades by Goldman Sachs, a bank, caused embarrassment and as yet unspecified losses. Even the most robust seem vulnerable.
But the frequency of such failures may actually make them less disturbing. Amazon and Google, generally reckoned to be capable and resilient operators on the web, each had blackouts in recent weeks. Systems were reset, business resumed, small losses were absorbed. Zero tolerance of failure, which applies to airlines, bridges and tunnels is not so vital for electronic operators and financial firms.
Especially if the problems are laid bare and addressed. The Securities and Exchange Commission (SEC) has ordered a post-mortem from the New York Stock Exchange’s Arca division, which electronically trades non-NYSE stocks and where the problems tied to the NASDAQ outage began. And it has asked for an account of what unfolded in a system operated by NASDAQ which consolidates trading at America’s 17 exchanges. The system was overwhelmed while trying to reconnect with Arca, triggering a “code blue” alert (a term used in hospital emergencies) and the cessation of trading.
Oddly, nowhere near as much attention is being applied to Goldman, which has been secretive about what went wrong. It has said only that “immaterial losses” occurred from trading problems during a system upgrade and that a review is under way.
It is widely believed that Goldman’s losses stemmed from a “dark pool” — designed to gather and match trading interest unobtrusively — which inadvertently spat out prices onto public exchanges. Reports put the losses anywhere between tens and hundreds of millions of dollars.
Even before the glitches, the SEC was taking increased interest in potential trading problems and how they might be disclosed. In March it published a proposal known as Regulation SCI (systems compliance and integrity). Exchanges and banks are resisting one of its requirements, which is to report blackouts even if they do not lead to anything as severe as trading halts.
America’s regulators are often accused of being heavy-handed. But forcing more transparency on the black boxes that have replaced screaming humans on Wall Street must be a good thing.
© The Economist Newspaper Limited, London (September 7th 2013)