Malfunction! Malfunction!

The roll of glitches started with Goldman's erroneous option buys, which the company insists will not be material to its bottom line (oh, to be able to say that about $100 million). Then, of course, Nasdaq had its implosion for several hours, China's regulator announced it would be reviewing the systems of all brokers on the mainland after Everbright's spectacular snafu, and then Eurex took a turn for the worse yesterday. That's not even counting the fat-finger error at the Tel Aviv Stock Exchange on Sunday.

Image Problem
"Nowadays exchanges are profit-making organizations, with the traditional big two of the New York Stock Exchange and Nasdaq facing competition from many alternative exchanges in the US," says Arie Gozluku, assistant professor of finance at Warwick Business School. "It could put off firms going public due to these types of liquidity problems which limit access to capital. Trust in the exchange is very important and the US Securities and Exchange Commission [SEC] are likely to push for more stringent rules to stop these system failures. There could be fines or penalties for technological problems, but it should also take into account other players in the game, not just the exchanges."

Indeed, Nasdaq was pointing the implied finger at other participants last week, but an exchange's technology is an exchange's business, particularly these days, when so many make commercial gold dust out of supplying it to fellow bourses.

So far there's been a relatively relaxed attitude, at least publicly, from the regulators. Mary Jo White of the SEC did issue a rather ominous note last week, saying that she would summon industry heads to discuss the problems at the Nasdaq and, I assume, elsewhere, but other than that this series of glitches has been characterized with less of the pandemonium that has typically accompanied similar episodes.

Acceptance
As markets become more electronic, and technology is the avenue through which trades occur, after all, there is a certain degree of inevitability regarding screw ups (to use the technical term). No technology is infallible, regardless of what industry it's deployed in. And it looks, on the surface at least, as if people are accepting that. Had this happened four or five years ago, the world would be up in arms.

Trust in the exchange is very important and the US Securities and Exchange Commission [SEC] are likely to push for more stringent rules to stop these system failures. - Arie Gozluku

That's not to say it's okay, of course. Exchanges, and increasingly, investment banks themselves, have a duty to keep an orderly market, which is abrogated by these system issues. But the degree to which systems can be future-proofed against all issues is variable, and expecting 100-percent uptime isn't entirely realistic. That being said, taking WBS's Gozluku's point, the damage this causes to confidence isn't ideal at this point in time.