Can traders still trust Nasdaq?

Large-scale computer errors seem to be the new normal

NASDAQ outage
(Image credit: AP Photo/Seth Wenig)

On Thursday, the Nasdaq stock exchange abruptly went down for three hours in the middle of the afternoon, leaving investors in the lurch and suspending billions of dollars' worth of trades. It also raised serious questions about the safety of computer-powered stock exchanges that handle a massive volume of trading every day.

The word is still out on what caused the breakdown — though theories have ranged from a squirrel to an attack by the Iranian hacking collective Cyber Fighters of Izz ad-Din al-Qassam.

"The most likely scenario is that some bug buried in zillions of lines of code caused some cascading failure," says Alexis Madrigal at The Atlantic, which would put the outage in line with a string of technological glitches the exchange has suffered in recent years.

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Facebook's IPO in 2012 is a memorable example. A technical error during the social network's public offering led to uncomfortable delays and a frantic sell-off that arguably cost Facebook millions. In May, Nasdaq paid $10 million to settle SEC charges over the matter.

In 2011, hackers broke into a web-based application that stored some of Nasdaq's information, leading to another round of nail-biting. But there was no evidence that trading was affected.

But it's not like Nasdaq is the only Wall Street entity susceptible to technical errors. Just Tuesday, a glitch at Goldman Sachs led to a deluge of erroneous orders in U.S. equity options markets.

And in 2010 a "flash crash" caused by an algorithm error sent the Dow Jones industrial average down 1,000 points in the blink of an eye.

So should these types of technical glitches spook Wall Street? Andrew Tangel of The Los Angeles Times says they "threatened to further erode investor confidence in the stock market."

Jonathan Weil at Bloomberg agrees, saying, "It's miraculous that trading halts like the one today don't undermine investors' confidence more."

Others say it's just a natural hazard of doing automated business at such a high volume. "As we continue to eliminate human beings from the execution of security trading, this is the problem you run into," Stephen Massocca, managing director of Wedbush Equity Management LLC in San Francisco, told Reuters. "These events are going to take place, given the level of automation."

Or as Madrigal puts it: "What we can say is that when things work in new ways, they break in new ways. And that's a theme that's worth obsessing over."

Here is what the Nasdaq looked like during the outage.

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