NYSE, NASDAQ Blame Each Other For Aug 22 ‘Flash Freeze’

by Trefis Team
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NASDAQ OMX (NASDAQ:OMX) was hit by one of the worst technology outages in the history of the U.S. financial markets last week. The exchange had to remain closed for over three hours on Thursday, August 22, during what would otherwise have been “normal market hours.” In an article analyzing the event, we mentioned that it would be ominous for the exchange’s reputation and could potentially cause its U.S. listings business to lose market share to NYSE Euronext (NYSE:NYX), especially in the tech sector.

However, new developments suggest that NYSE Euronext may first have to clear its own name in this case. According to recent reports from Reuters and Bloomberg, NASDAQ’s executives are blaming NYSE Arca for the technology failure. [1] [2]

See our full analysis for NYSE Euronext | NASDAQ OMX

What Happened?

Last week’s market shutdown was preceded by a connectivity failure between NYSE Arca and NASDAQ’s data processing system, called the Securities Information Processor (SIP). Executives at NASDAQ seem to believe that NYSE Arca’s repeated attempts to re-establish connectivity led the SIP system’s memory to overflow, and caused it to crash. In short, they claim that NYSE Arca initiated the technology glitch by bombarding its system with connection requests.

In their defense, NYSE leaders argue that such connectivity failures are nothing new in the financial services industry and NASDAQ’s incompetent technology is to be blamed because it could not handle the connectivity requests.

What Does It Mean For NYSE Euronext?

NASDAQ has traditionally been the top destination for tech companies that go public, but of late NYSE has been targeting its existing and potential clients by discussing with them NASDAQ’s shortcomings during the Facebook IPO. In fact, NYSE seems to be succeeding in this effort since  it was able to attract 16 of the top 20 most highly valued VC-backed technology IPOs of 2012, according to an analysis done by Venture Beat. [3] It also scored a big win this year in June when Oracle Corp (NASDAQ:ORCL) became the first major U.S. tech firm to transfer its stock listing from NASDAQ to NYSE.

Earlier, we anticipated that NYSE would use the recent outage as another talking point against NASDAQ, and try to lure more companies away. However, NYSE Arca’s potential involvement in last week’s flash freeze is likely to push the exchange on the defensive. Arca’s own history is not spotless as it was widely blamed for causing the flash crash in 2010. This makes the exchange equally vulnerable to attacks from NASDAQ.

Going forward, it should be interesting to see whom the regulators favor in this case. We also expect all the exchanges in the U.S. to be subjected to some new regulations in the wake of this catastrophe.

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Notes:
  1. Nasdaq Focus on ‘Defensive Driving’ After Trading Outage, Bloomberg, August 23, 2013 []
  2. Nasdaq, NYSE at odds on outage cause as SEC seeks facts, Reuters, August 27, 2013 []
  3. Look out, Nasdaq: NYSE proclaims itself the new king of tech IPOs, Venture Beat, May 31, 2013 []
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