- The Washington Times - Thursday, August 22, 2013

It was supposed to make the stock market run smoother and more efficiently. But the near-total computerization of stock trading in the U.S. led once again to a huge technical glitch that, for three hours on Thursday, stopped trading altogether on the Nasdaq Stock Market, with investors unable to buy or sell a long list of heavily traded tech stocks from Apple to Facebook.

The unprecedented hiatus in trading on the second-largest U.S. exchange did not cause a panic like the “flash crash” did three years ago, when a barrage of computer-generated sell orders by an obscure investment fund precipitated a sudden, nearly 1,000-point drop in the Dow Jones industrial average in a matter of minutes, a dizzying fall that was just as quickly retraced when the glitch was ironed out.

On Thursday, trading on the New York Stock Exchange went on routinely even while Nasdaq was shut down, and Big Board stocks as well as Nasdaq-based stock indexes managed to post modest gains by the end of the day.

But critics of the hair-trigger, nanosecond computer trading that now dominates the U.S. stock market have warned for years that another big meltdown is likely as computers, just like humans, occasionally make mistakes or trigger unforeseen events with the potential to cause horrendous damage within a matter of minutes before humans regain control over the markets.

“All this progress has paid some perverse dividends. The computers that banished the file clerk and, more recently, the trader, have become so powerful that their mistakes can lead to market meltdowns,” said Stephen Mihm, associate professor of history at the University of Georgia. “It almost makes one nostalgic for the clerical errors that bedeviled Wall Street nearly a half century ago.”

The technical hiccups appear to be more frequent as humans have stepped aside and let the market increasingly be taken over by robots. The software malfunction Thursday has not been fully explained, but it led to a suspension of all trading in $5 trillion worth of Nasdaq stocks.

Two days earlier, Goldman Sachs software accidentally spammed exchanges with false stock option orders. That mistake will cost the Wall Street titan some $100 million to correct.

Last week, problems at the Chinese trading firm Everbright Securities caused a sudden 6 percent spike in China’s main stock index in Shanghai.

Last year, Nasdaq was embarrassed by technical problems that marred the debut of Facebook’s much-anticipated first stock offering. The Securities and Exchange Commission fined Nasdaq $10 million in connection with the incident.

In view of its high-profile problems, Nasdaq’s own stock took a beating, diving by 4 percent, when full trading on the exchange resumed Thursday at 3:25 p.m., more than three hours after it announced the shutdown at 12:15 p.m.

“It’s fair to say that electronic markets have amplified tiny errors into enormous ones as they cascade through digital channels,” said Matthew Philips, a Bloomberg BusinessWeek columnist. He urged Wall Street trading firms and exchanges to quickly figure out how to prevent problems before federal regulators come crashing down on their heads.

“These glitches provide red meat for those who think that computer-driven trading, particularly high-frequency trading, is inherently dangerous. It’s increasingly hard to argue with the critics as problems recur,” he said.

High-frequency trading is the growing practice on Wall Street of programming computers to buy and sell huge blocks of stocks repeatedly, sometimes over a period of seconds or minutes, to generate profits from small moves in a stock’s price.

The Securities and Exchange Commission, which has been monitoring high-frequency trading for signs of abuse, appeared poised for action Thursday after closely monitoring how Nasdaq handled the trading suspension.

“The commission is determined to enhance the safeguards necessary for strong market systems,” said newly installed SEC Chairwoman Mary Jo White, pledging to push through technical standards proposed by the SEC and explore other regulations.

“Today’s interruption in trading, while resolved before the end of the day, was nonetheless serious and should reinforce our collective commitment to addressing technological vulnerabilities of exchanges and other market participants,” she said. “The continuous and orderly functioning of the securities markets is critically important to the health of our financial system and the confidence of investors.”

After the flash crash in May 2010, the SEC put into place rules to prevent a repeat.

“The trading system is like an electric grid. Problems in one area can blow up” and affect the whole system, said Michael C. Khouw, primary strategist at Dash Financial and contributor to CNBC. “That is worrisome,” but “electronic connectivity has also done much to reduce risk in the system as well,” he said.

Some analysts said Thursday’s incident showed that computerized trading, even when it causes major glitches, is basically harmless and doesn’t have the power to hurt the larger economy in any big way.

“Did anyone notice that even as high-frequency trading was halted for a few minutes, that actual economic activity didn’t screech to a halt?” asked Justin Wolfers, an economics professor at the University of Michigan.

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