- The Washington Times - Sunday, January 22, 2006

NEW YORK (AP) — Computers at the Tokyo Stock Exchange couldn’t handle a deluge of orders amid a major sell-off last week, and a hiccup at the Nasdaq Stock Market meant investors saw incorrect stock-price movements online for much of the day Thursday.

The world’s stock markets handle billions of transactions every day, but the computer problems at the two major global exchanges reminded investors that electronic systems aren’t foolproof — a sobering thought when trillions of dollars are involved.

“These events are definitely a wake-up call for the exchanges to make sure their technology is the best it can be,” said David Easthope, an analyst with research firm Celent. “These kind of things can really feed a cycle that can affect investor confidence.”

The Nasdaq’s computer errors resulted in numerous Web sites’ and online brokers’ displaying incorrect price shifts on stocks listed on the New York Stock Exchange. Although the prices were correct, the magnitude of price movements was not, resulting in some stocks’ appearing to be up when they actually were down, and vice versa.

Nasdaq spokeswoman Bethany Sherman said the computer error that caused the problem was fixed.

“This kind of problem is bad, certainly, but not terrible,” said Yakov Amihud, a professor of finance at New York University’s Stern School of Business. “There may have been some confusion regarding pricing that kept some people out of the market, but at least their ability to trade wasn’t impacted like it was in Tokyo.”

In the second day of a two-day sell-off, with Japan’s Nikkei 225 index off by nearly 6 percent, the heavy transaction volume prompted the Tokyo Stock Exchange’s computers to shut down trading 20 minutes before the end of the Thursday session.

That left investors who wanted to buy or sell stocks — hoping either to limit losses or to pick up bargains — without the ability to trade. Those are the kinds of situations that can bring about a panic, specialists said.

“When you have this kind of problem, it calls into question the entire system,” Mr. Amihud said. “As an investor, you question whether the liquidity in that market is there, whether you can buy or sell exactly when you want to. And maybe you decide to sell off your stocks if you don’t trust the system.”

The Tokyo Stock Exchange said yesterday that it plans to boost its trading capacity but will keep shortened trading sessions for now.

After successful tests over the weekend, the world’s second-biggest exchange said it now can handle as many as 5 million transactions daily.

The exchange said it will continue to shorten its afternoon session by 30 minutes and will shut down all trade if the number of trades hits 4.5 million. Exchange Chairman Taizo Nishimuro said the exchange plans to boost its transaction capacity to 8 million by the end of the year.

The NYSE can handle 25 million messages per day — orders to buy or sell, as well as messages and reports among traders. Anne Allen, executive vice president of market operations for the NYSE, said tests show that the Big Board easily could handle at least 150 million messages.

The exchange learned its lesson about the need for fast and reliable computers during the crash of Oct. 19, 1987, when the Dow Jones Industrial Average plunged 508 points, or 22.6 percent, and volume came to a then-inconceivable record of 604.33 million shares. The NYSE did not shut down, but the system was overloaded, and many traders did not know at any given moment what the actual price of a stock was.

“Since then, of course, we’ve had a very aggressive capacity planning function,” Ms. Allen said. “It can be almost utilitylike, the demand for capacity, with everybody wanting it at the same time. You have to be way ahead, by a couple of steps.”

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