Nasdaq market paralyzed by 3-hour shutdown

By Chuck Mikolajczak and Rodrigo Campos

NEW YORK (Reuters) - Trading in thousands of U.S. stocks ground to a halt for much of Thursday after an unexplained technological problem shut down trading in Nasdaq securities, the latest prominent disruption in U.S. markets.

Nasdaq resumed trading at around 3:25 p.m. EDT (1925 GMT), after a roughly 3-hour, 11-minute shutdown of trading in Apple, Google, Microsoft and more than 3,000 other U.S. companies. The shutdown was the longest in recent memory.

"Any brokerage firm gets paid by executing orders," said Sal Arnuk, co-head of equity trading at Themis Trading in Chatham, New Jersey. "So yes, we are frustrated, and this hurts us, it hurts the market and it hurts public confidence."

 

All traffic through Nasdaq stopped abruptly at 12:14:03 p.m. (1614 GMT). Trading in a single stock resumed at 3 p.m., and other stocks soon followed.

Nasdaq's own stock , which was up 0.8 percent before the halt, closed down 3.4 percent, after earlier trading down as much as 5.4 percent.

The exchange blamed a problem with distributing stock price quotes for the shutdown. A source familiar with the matter described the problem as a "data feed issue."

"I can't remember this happening in recent memory," said Christopher Nagy, president of consultancy firm KOR Trading and a former head of trading at TD Ameritrade .

During the shutdown, trading of shares not listed on Nasdaq continued, but transactions could not be executed on the Nasdaq platform. Options trading was also halted.

Nasdaq and its larger rival, NYSE Euronext's New York Stock Exchange, said all trades executed between 12:14:03 and 12:23:31 p.m. would stand.

While some trading activity appeared normal following the resumption, difficulties persisted. Nasdaq said it stopped routing orders to NYSE's all-electronic ARCA platform shortly after the resumption.

The U.S. Securities and Exchange Commission said it was in touch with the exchanges, with Chairman Mary Jo White overseeing developments from her home office near New York City.

White House spokesman Josh Earnest said President Barack Obama had been briefed about the disruption, during which investors had limited market access to trade such familiar names as Apple Inc , Facebook Inc , Google Inc and Microsoft Corp .

In all, Nasdaq lists about 3,200 companies.

"As we continue to eliminate human beings from the execution of security trading, this is the problem you run into," said Stephen Massocca, managing director of Wedbush Equity Management LLC in San Francisco. "These events are going to take place, given the level of automation."

TECHNICAL GLITCHES

The outage was the latest black eye for Nasdaq, which in May agreed to pay $10 million, the largest penalty ever against a stock exchange, to settle SEC civil charges over its mishandling of Facebook's initial public offering.

James Angel, a Georgetown University finance professor who sits on the board of rival exchange operator Direct Edge, said Nasdaq appeared to take steps to ensure that trading reopen in an orderly fashion and with correct pricing.

"We can live with the market being closed for a little bit, but we can't live with bad pricing," he said. "It's far better to have the market shut down and take its time re-opening, than to have what happened with the Facebook incident... It looks like they've learned their lesson."

William Lefkowitz, options strategist at National Securities in New York, said options trading in such companies as International Business Machines Corp dried up during the halt. But he said the reopening was "very orderly and liquidity is back to normal. It is almost like it did not happen."

Thursday's outage was the latest high-profile glitch in U.S. stock markets.

On Tuesday, a technical problem at Goldman Sachs Group Inc resulted in a flood of erroneous orders in U.S. equity options markets.

Two weeks earlier, on August 6, stock exchange operator BATS Global Markets faced a nearly hour-long outage.

In 2012, a trading blowup at Knight Capital Group Inc was a contributing factor to the eventual sale of that company.

Other trading venues were also affected by Thursday's outage. Several "dark pools," which execute orders anonymously, were forced to stop trading, several market participants said.

"The frequency of technical issues affecting trading is a wake-up call to business leaders in capital markets," said Lev Lesokhin, executive vice president of Cast, a specialist in business software analysis. "They need to carefully scrutinize the structural integrity of their software systems."

SEC SCRUTINY

Thursday's outage could cause problems for Nasdaq at the SEC, which has cracked down on stock exchanges to beef up their compliance with regulations and police themselves better.

White, who joined the regulator in April, is a Nasdaq veteran, having served on its board as recently as 2006.

In June, a month after Nasdaq settled with the SEC over Facebook, the Chicago Board Options Exchange was ordered to pay $6 million to settle SEC charges that it failed to properly enforce short sale rules.

The NYSE last year became the first exchange in SEC history to face a financial penalty after it supposedly gave some customers an "improper head start" on trading information.

In March, the SEC proposed rules to require exchanges and other trading platforms to be better prepared to handle major market disruptions, including those caused by technology glitches. Those reforms are still out for public comment.

(Additional reporting by Herbert Lash, Samuel Forgione and Ryan Vlastelica in New York, Sarah N. Lynch in Washington, D.C.,; Doris Frankel in Chicago; and Hezron Selvi in Bangalore; Writing by Dan Burns and Jonathan Stempel; Editing by Nick Zieminski, Andre Grenon, Kenneth Barry and Dan Grebler)