Credit Suisse: Exchanges should be liable for tech glitches

Tue Jun 19, 2012 6:26pm EDT
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By Sarah N. Lynch and John McCrank

WASHINGTON (Reuters) - Exchanges should be held legally responsible for technology glitches like the one that plagued exchange operator Nasdaq OMX (NDAQ.O: Quote) during Facebook's (FB.O: Quote) public market debut, a top executive at Credit Suisse will tell lawmakers on Wednesday.

Dan Mathisson, the head of Credit Suisse's CSGN.VX U.S. Equity Trading, will present his case before a U.S. House Financial Services panel on Wednesday as lawmakers explore various possible market structure reforms.

Nasdaq, which will not be present on Wednesday, is facing litigation after a technology glitch delayed Facebook's IPO on May 18 by half an hour. In the confusion that followed, market makers did not receive confirmations of their opening orders for two hours. Some orders were lost entirely.

Nasdaq has proposed a $40 million plan to compensate clients harmed in the Facebook IPO, made up largely of trading rebates. But critics have said the plan falls short of the up to $450 million that reportedly would be needed to make all of the firms whole.

In his prepared testimony, Mathisson will say that exchanges have historically been considered "quasi-government units" because of their unique self-policing role, effectively shielding them behind "absolute immunity" when they make errors.

But in today's world, where exchanges are for-profit ventures that are competing for market share with brokers and other anonymous trading venues like "dark pools," such immunity no longer makes sense.

Credit Suisse's dark pool, Crossfinder, is one such competitor with Nasdaq and exchange operator NYSE Euronext NYX.N.

"We believe that providers of trading technology will naturally exercise greater caution if they have material liability when their technology fails," he will say. "Restoring exchanges' moral hazard would be an important step towards creating a more reliable marketplace."   Continued...

The entrance to a Credit Suisse branch is seen in New York February 6, 2012. REUTERS/Shannon Stapleton