Nasdaq’s Shutdown: What Next?

Thomas Peterffy, the founder and chief of Interactive Brokers (IBKR), was around at the creation of the modern market. He was one of the first people on Wall Street to use computers to price stocks and options.

AP

As one of the architects of the modern securities market, we reached out to him for insights into what can be done to make the securities markets more stable a day after problems at the Nasdaq Stock Market essentially shuttered the U.S. stock and options markets for about three hours. Nasdaq's (NDAQ) chief, Bob Greifeld, told a reporter that Nasdaq's systems, and those of the securities industry, need to be more robust.

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There will be problems along the way, however.

"We should all recognize that computer systems are inherently complex and subject to failure," Peterffy wrote in an email. "This has always been plainly obvious to computer programmers but not so to the general public."

In an email, Peterffy offered what he called a few simple steps that could be taken to greatly reduce the vulnerability of the system:

1. Exchanges should examine and reject each order the execution of which would result in an invalid trade. But they do not want to do this because it would slow up trading and exchanges could possibly lose revenue.

2. Eliminate potential single points of failure. Broker/dealers and exchanges should have individual connections for all messages, so if any B/D or exchange fails the system continues to function.

3. Before Nasdaq was given the authority to consolidate and charge for quotations, B/Ds had built their own quote consolidation systems. Had that remained in place, yesterday’s issue would not have arisen. Nasdaq would have stopped trading but all other venues that list those stocks could have continued transmitting their prices and quotes to all their participants.

Shares of Nasdaq OMX Group have gained 0.4% to $30.58 today, while CME Group (CME) has fallen 1.1% to $71.89, IntercontinentalExchange (ICE) has dropped 0.2% to $185.16, and NYSE Euronext (NYX) has ticked down 0.1% to $42.66.