Is there like a five-minute rule for equity traders and Nasdaq shutdowns? I suppose if you are at a bar now and not reading this because you took off after the first hour of Nasdaq down time, the joke is on you because it got better and all your more diligent competitors are making money while you’re not. Today’s session ended with about half an hour of what I will guess was some fairly drunken trading.
What would you do if you wanted to buy Apple this afternoon, for instance because Carl Icahn tweeted maybe-news about it?1 I mean: Apple shares are not, like, property of the Nasdaq. You could just buy some shares. Like, call a guy, be all “hey do you have Apple shares?,” he’s like yeah, you negotiate a price, do the trade, you write him a check, he sends over some shares. Usually people buy a lot more Apple shares off Nasdaq than on it. Here:
White line is Apple shares traded each day; orange line is Apple shares traded on Nasdaq. Total volume is usually more than 4x Nasdaq volume.
But, today, nope, no trading:
“It’s really shocking. We’re stuck,” said Ramon Verastegui, head of global engineering and strategy at Société Générale. “If we want to trade Apple, we can’t.”
“It has essentially halted” trading, Ian Winer, director of equity trading at Wedbush Securities Inc., said in an interview. “We cannot execute customer orders in any Nasdaq security so we are basically in a wait-and-see mode from Nasdaq.”
Why? As far as I can tell the answer is along these lines:
Nasdaq said earlier that trading in shares it lists had been stopped amid issues at its Securities Information Processor, the feed that disseminates quotes and prices. The second-biggest stock market operator in the U.S. halted transactions in what it calls Tape C, which comprises all Nasdaq-listed securities.
SIP, or securities information processor. An organization responsible for disseminating official information about the quotes and trades taking place on an exchange. Nasdaq acts as the SIP for securities listed on its market, and other exchanges refer to it to know what’s going on on that market. Other market participants, like brokerages, can use the SIP for trading data, or they can subscribe to private feeds from exchanges …
The intuition is roughly that, as a broker or exchange, you have to offer best execution, meaning execution at or inside the national best bid or offer. If you can’t tell what the national best bid or offer is – because the computer responsible for aggregating information from exchanges and ECNs and distributing it to everyone is at Nasdaq, and is kaput – then you have to pretty much sit around twiddling your thumbs. “For a little while you could trade in dark pools, but even my dark-pool vendor shut down,” said a guy, which makes sense since dark pools have to trade at or inside the published prices too. So: there was nothing.3
This is not, like, a phenomenon of nature, or even of computer glitches; it’s the result of a series of choices. In the olden days, if the NYSE’s buttonwood tree fell over, you could just go find another tree to trade under. The national market system regulations went into effect in 2005. During my lifetime Nasdaq was not a “stock exchange” but just a computer system linking brokers quoting over-the-counter trades in stocks not listed on any stock exchange. If you were buying credit default swaps in 2007, and your dealer’s computer crashed, you’d just call another dealer. Now that market is creaking toward centralization too, though today’s outage might make be enough to give opaque bilateral markets a good name.
There’s a rough and ready conservation law in finance where the quantity of risk is hard to change, but you can reduce its frequency at the cost of increasing its intensity.4 You can have a national market system with tons of real-time transparency of quotes and prices, no dealer monopolies on trading or data, and few opportunities to hose customers with opaque pricing. Those are all great! But the mechanical way of doing that requires that, every once in a while, when Nasdaq’s computers break down, everyone is stuck sitting around not trading. Which honestly, on an August Thursday, is not the worst result. Nasdaq’s computers probably made a lot of new friends today.
1. Like, blah blah blah Reg FD blah blah insider trading blah blah is this Apple news that should be announced somehow other than Carl Icahn tweeting about it? I mean, Apple has already said it’s doing a buyback, so this tweet isn’t really material news, though I guess “meeting with a guy to be shouted at about doing more buyback” maybe is. The meeting itself feels like it’ll be the sort of not-quite-material chat that big investors have with companies that allow them to outperform investors who don’t have those not-quite-material chats with managements, I dunno. MAYBE ICAHN WILL LIVE-TWEET IT.
3. If you’re like a hedge fund or bank prop desk could you just arrange a trade over the phone? (If you’re a mutual fund you might worry about your obligations to get the best price for your clients when there’s no quoted price.) I think you might run into trouble with your obligations to report trades to the tape instantly, if there’s no tape. Also you might have like gotten rid of your phone, and your traders I guess, and you’re just a lonely computer now with no way to buy stocks.