Do Stock Exchanges Need a Kill Switch?

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The Nasdaq’s debacle last month sent a strong message to United States regulators: steps must be take to prevent future breakdowns. In response to recent trading problems, Securities and Exchange Commission Chair Mary Jo White met privately in Washington D.C. on Thursday with the executives of the United States’ major stock market exchanges to hammer out rough versions of five reforms, including a so-called “kill switch,” reported Reuters on Thursday.

On August 22, trading was halted on the Nasdaq OMX’s (NASDAQ:NDAQ) exchange in what is known in the industry as a “flash freeze.” The incident, which negligibly affected stock prices, reminded regulators and exchange operators of just how fragile the modern market is given its dependence on intricate software systems. It was a problem with its software — the technology on which trading relies — that forced the Nasdaq exchange to go offline for more than three hours, a slightly ironic problem for an exchange home to many of the worlds biggest technology companies.

Nasdaq OMX “determined to halt trading after the SIP [Securities Information Processor] could not process quotes, thereby impacting the fair and orderly functioning of the public market,” read a press release explaining the trading halt. The exchange operator’s review determined that “high frequency trading played no role in the technology events,” rather that, “the catalyst for the SIP failure was a confluence of unprecedented events that overwhelmed the processing capacity” of the Nasdaq system that reports prices of recent trades.

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