Analysis: U.S. exchanges grapple for solutions to trading glitches

Tue Nov 26, 2013 1:46pm EST
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By Herbert Lash

NEW YORK (Reuters) - U.S. security exchanges are feverishly working in the wake of August's Nasdaq trading halt to reinforce a market that too frequently seems to succumb to technology glitches, but these efforts are unlikely to rectify all the weak spots.

What appeared to be a workable solution two months ago to create a back-up for the exchanges' "securities information processors," or SIPS, like the one that got clogged with reams of quotes in Nasdaq-listed stocks on August 22, now looks too complicated, according to sources familiar with the talks.

Making the SIPs more resilient highlights a problem for a market that generally operates exceptionally well, despite a number of high-profile technology failures since early 2012, including Nasdaq's botched handling of Facebook's IPO that May.

The more than 50 equity trading venues and their links to hundreds of brokerages, with differing software and numerous order interfaces with the market, have created a system so complex it is vulnerable to failure in countless ways.

To combat this, broker-dealers and market makers have put a premium on enhancing their early warning detection of bugs and other anomalies, and swift damage control when problems occur.

Monitoring for potential glitches or other application failures has taken on greater importance with the market now geared to trade large volumes of securities in microseconds, said Donal Byrne, chief executive of Corvil, which monitors the performance of trading platform operating systems.

"The risk systems that are largely in place today were built for human time. They weren't built for machine time," Byrne said.

"Machine time happens in microseconds, milliseconds and seconds. If you can't detect, alert and react within that time frame, there's a pretty good chance you can't address the risk that you're exposed to. Within a second you could have traded yourself out of business."   Continued...

Commuters pass by the NASDAQ Marketsite in New York, May 21, 2012. REUTERS/Brendan McDermid