Nasdaq Glitch Is The Latest Technical Snafus For Markets

New questions are being raised about the reliability of U.S. financial markets after all trading in Nasdaq stocks was shut down for three hours on Thursday. Nasdaq blamed the problem on its system for quoting prices. The trading halt immediately led to calls for markets to make their software systems more robust and compatible.

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RENEE MONTAGNE, HOST:

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At 12:14 Eastern Time yesterday, a technical glitch brought trading at the NASDAQ Stock Market to a sudden halt. The flash freeze affected every company listed on the exchange.

GREENE: Meaning, for three hours, shares of some of the biggest and most valuable companies in the world, including Apple, Microsoft and Facebook, could not be bought or sold.

MONTAGNE: As NPR's Steve Henn reports, yesterday's market glitch is far from unique.

STEVE HENN, BYLINE: The list of technical hiccups on Wall Street is long and it's growing. There was the flash crash. Facebook's IPO. This April, a fake tweet from an Associated Press account caused computerized trading systems to start a sell-off. And then just two days ago, a software glitch at Goldman Sachs spewed a wave of invalid trades into the markets, causing wild price swings.

James Arlen says you don't need computerized systems to run a stock exchange, but these days our stock exchanges can't seem to work without them.

JAMES ARLEN: There was a time when we didn't do it that way, you know. You could run a stock market using teenage boys with chalk and chalkboards, and that was how it was done.

HENN: Not any more.

Arlen is an IT security consultant who does lots of work for financial institutions. He says one reason the stock markets seem more unstable now is that these markets operate at close to light speed.

ARLEN: Transactions are occurring in millisecond or submillisecond's time.

HENN: That's so fast that it's hard for human beings to really comprehend it.

ARLEN: So slice a second into a thousand parts and you're using less than that to complete a transaction.

HENN: Millions of dollars exchanged in the blink of an eye.

ARLEN: And you think of the blink of an eye as being an awfully fast kind of thing, well, you've got transactions that are occurring in that kind of timeframe and they are happening one on top of each other as fast as possible.

HENN: Now pause for a say a thousand milliseconds and think about what a transaction actually is. Its two parties agreeing to the sale of a security at a given price. And those prices change every fraction of a second.

So what happens if my computer doesn't agree with your computer on the time? What if our two machines are a microsecond off with their clocks?

ARLEN: You know, buy 10 shares in this microsecond and I want to buy 10 shares in that microsecond. And those are two different price values.

HENN: So a spike in activity, or a loss of connectivity, or a surge of bogus trades, even static in the system can all create enough of a delay that trades stack up.

Yesterday, it was a glitch in the system that disseminates prices that shut the NASDAQ down. And that glitch was caused by a bad connection between big market participants.

Mary Jo White, the head of the SEC, said the trading halt reinforced the need for Wall Street and regulators to fix technological vulnerabilities in these exchanges.

And recently, some on Wall Street and in the tech community, like James Arlen, have speculated that traders could launch little cyber attacks on each other.

ARLEN: So if I can arbitrarily hold you off of the communication line by slamming you with a bunch of traffic that you are not anticipating and you don't know how to cope with, then I can have my trades go through when yours don't.

HENN: The SEC proposed new rules this past spring to prevent mishaps brought on by automated trading programs running amok, but Wall Street has fought the idea.

And while yesterdays three hour unplanned hiatus for the NASDAQ may have caused some consternation, Charlie Ellis who founded Greenwich Associates and has written numerous books on investing, doesn't think events like this one will undermine confidence in the markets.

CHARLIE ELLIS: I think there will be some phones slammed and feet stamped and rude remark made, you know, maybe some waste bags get kicked over, but within a week or a month for sure, nobody will particularly care.

HENN: Ellis has been watching Wall Street closely for years. He says today, more than 95 percent of trades are done by institutions - and those big investors are unlikely to get spooked.

Steve Henn, NPR News.

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