Reputational issues are more likely to provoke exchanges to reform their technology than regulation, according to Larry Tabb, CEO of research consultancy TABB Group.
Following Nasdaq’s three-hour downtime two weeks ago, the exchange operator has completed an initial review of the problem and found its technology did not failover in an orderly manner following extreme message traffic from rival exchange NYSE Arca.
Nasdaq said it received a large number of requests at its securities information processor (SIP), which it is responsible for maintaining for all Nasdaq listed stocks, from NYSE Arca. The volume of requests was well above the SIP’s tested limits and caused the system to fail to properly handle those requests before it was shut down.
The use of technology by exchanges is currently the focus of the Securities and Exchange Commission’s (SEC) latest rules proposal, Regulation Systems Compliance and Integrity (RegSCI).
However, Tabb doubts whether regulation is likely to lead to any significant change to prevent future problems.
“I don’t think RegSCI really had the potential to sort out these kind of problems because it’s not going to stop faulty technology of exceptional circumstances from causing problems,” he said.
While firms failing to comply with RegSCI could be fined, the SEC is already able to fine exchanges for technology problems (Nasdaq itself was fined earlier this year for its botched IPO of Facebook).
Tabb said that reputational damage was more likely to prompt exchanges to improve their technology: “The SEC could slap Nasdaq with a fine, but really that’s nothing compared to having their name dragged through the mud on Wall Street as it has in the last couple of weeks.”
He added that exchanges should ensure they have better throttling measures in place to ensure they don’t suffer similar issues, as effective management of message flow into technology systems would prevent vital systems from falling over.