The computer problems that brought the Nasdaq to a halt and left traders anxiously twiddling their thumbs for more than three hours on Thursday was just the latest in a string of technical and other glitches that have left investors skittish about the stability of exchanges.
First, there came the squirrels. In 1987, one sparked a power outage that closed the Nasdaq market for a total of 82 minutes and, an official calculated, prevented about 20 million shares from being traded. Clearly, Nasdaq’s power lines exerted a magnetic attraction of some kind for suicidal squirrels; another one decided to lunch on them seven years later. (“They may have found the body,” a spokeswoman for the Connecticut-based utility said ominously at the time.) That outage lasted only 34 minutes before Nasdaq was able to switch to its back up power source.
Things have gotten squirrelly often since then, though computer issues have tended to be the cause rather than rodents. In the last few years alone, we’ve had the Flash Crash, the Knight Trading debacle, the Facebook IPO problems and now this “Flash Freeze,” which ended just in time for a final hour or so of trading. (Oh, stocks ended the day higher, in case you were curious.)
Here’s the most important thing to remember about yesterday’s snafu: It almost certainly made no difference to the vast majority of investors. It didn’t take place in the midst of a time of tremendous turmoil, when having real-time price discovery was vitally important in order for most of us to execute trades that would protect our portfolios from big losses. Many of us may have been unaware of what was going on, and no worse off for that.
That’s just the way it should be: We should be able to make a decision that a given company is a great long-term investment and then leave it untouched in our portfolios until either our view of the company alters or we need to rejigger our investments because our overall strategy or risk tolerance has changed. Monitoring stock prices on a day-to-day, hour-to-hour basis isn’t something we need to do: As yesterday probably demonstrated, all it really accomplishes is to encourage the development of a fresh ulcer.
That doesn’t mean that yesterday’s snafu was completely insignificant. “In and of itself I don’t know that this matters very much,” says Brad McMillan, chief investment officer for Commonwealth Financial. “What does matter is that stuff like this is happening with increasing frequency.”
Cumulatively, the repeated mishaps call into question the ability of exchanges to manage the challenges presented by rapidfire computerized trading. For every high-profile shutdown like this, there are smaller messes that occur far more often. A case in point: Earlier this week, a problem with a software system within Goldman Sachs went awry on Tuesday, resulting in a series of mistaken options orders, many at prices that didn’t bear much resemblance to the prevailing market price. The systems at a handful of other trading firms responded, executing those orders. Exchanges have cancelled many of those trades, limiting Goldman’s losses but wiping out profits that those counterparties thought they were making.
Whether it’s caused by a hungry squirrel, a “fat finger” (when a trader accidentally hits multiple keys at once) or an “algo gone wild” at one of the large number of high-frequency trading firms whose buy and sell orders are dictated by these programs, exchanges need to be better prepared to handle this kind of crisis.
Yesterday’s turmoil simply shut everyone out of the market. What if, however, only some market participants had been shut out during a period of tremendous volatility? Or if messed-up signals caused the market to think that a widely owned stock had lost half of its value, in turn triggering panic among investors for whom that stock was a key holding?
It’s time for both trading firms and regulators to provide the market with some transparency not just on what happened (in the form of studies and reports about these mishaps) but on what can and should be done to minimize them and to make sure they don’t take place at times of great volatility or turmoil.