Exchanges Repeated Software Errors Could Weigh On Investor Confidence

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NYSE Euronext

Securities exchanges seem to have become more vulnerable to technology glitches than ever. Within a month of the ‘flash freeze’ that caused U.S. stock trading to halt for over three hours on August 22, another bug caused the markets to come to a standstill this week. On Monday, September 16, trading in stock options had to be stopped for over half-an-hour due to problems in a feed dissemination service managed by NYSE Euronext (NYSE:NYX). [1]

The snafu seems to underline the fact that the problem of software glitches plagues the whole industry. No particular exchange can be regarded as especially immune from technological issues. Whereas the current outage is being attributed to a subsidiary of NYSE Euronext, last month’s three-hour-long flash freeze arose from the data feed managed by NASDAQ OMX (NASDAQ:NDAQ). The Chicago Board Options Exchange (CBOE) also had a major software related outage earlier this year. [2] (Read: NASDAQ’s Glitch Could Negatively Impact Its U.S. Listings Business)

See our full analysis for NYSE Euronext | NASDAQ OMX

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Maybe, investors will have to learn to live with such mishaps. The financial world has become increasingly complicated, and the technology required to support it has become equally complex and interdependent. It might be practically impossible to anticipate and abate all possible type of technological errors, especially if they occur due to interactions with external systems. NASDAQ recently pointed out that August’s flash freeze was caused by the repeated pounding of its computers by connectivity requests from NYSE Arca. Apparently, the repeated requests caused NASDAQ’s computer system memory to overflow. (Read: NYSE, NASDAQ Blame Each Other For Aug 22 ‘Flash Freeze’)

However, one can only hope that investors will continue to trade regardless. Being unable to exit a position when desired is a big turn-off for investors, and recurring software glitches make doing so even tougher. Frequent shutdowns also act as a reminder that markets are not yet completely safe. Together with loss of market share to alternative trading venues, the lack of investor confidence in the markets has caused trading volumes at U.S. exchanges to decline over the past few years. NASDAQ’s average daily U.S. share trading volume declined from 9.77 billion in 2009 to just 6.44 billion in 2012. The number of U.S. cash products shares handled by NYSE every year also declined by nearly 50% from 2009 to 2012.

Currently, we project the U.S. cash trading volumes at both of these exchanges to remain suppressed until the macroeconomic environment improves for good. However, with repeated software bugs continuing to weigh down on investor sentiment, one should not be surprised if volumes keep trending lower for an extended period of time.

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Notes:
  1. U.S. options trading again halted due to systems glitch, Reuters, September 16, 2013 []
  2. CBOE identifies software glitch that halted trading, Chicago Tribune, April 26, 2013 []