The expression; “when you’re in the restaurant business, you’re going to break a few eggs”, was at times used by traders attempting to explain errors, both in judgment and mechanical, to their supervisors. It was an acceptable term if it was ultimately determined that the error was unforeseen or deemed to be a “one-off” that with corrective actions was preventable from happening again.
If it is determined that the circumstances involving Nasdaq’s outage are in fact along these lines, then we as an industry should breathe a sigh of relief that this one-off event did not create a contagion and that the muted response by investors to both Nasdaq’s share price and overall behavior during the outage was rationale. We should move on with our lives wiser from the lessons learned. But, if a final post mortem shows a smoking gun for larger issues, especially those which put the functionality of a Securities Information Processor (“SIP”) at risk, then the industry’s response should be decisively appropriate. The Nasdaq and NYSE run SIPs to distribute quotes for the three tapes – Tape A, B, and C. Nasdaq’s SIP compiles quotes for Tape C, while NYSE runs the SIP for Tapes A and B.
In the aftermath of Reg NMS, the U.S. marketplace continues to play catch-up in redesigning certain functions performed in the past for today’s highly technological marketplace. One important function is how today’s marketplace handles, “order imbalances”. Prior to Reg NMS, when an order imbalance existed, the marketplace’s response was to; temporary halt the stock; disseminate an indication; allow the book, or liquidity, to build and then reopen the stock. This function was performed by the specialist and it served investors well for a long time. The newly created; Limit Up, Limit Down Plan, (“LULD”) is today’s version of that function and it deserves our full attention now before it is rolled out to all NMS Securities.
Under the LULD Plan it is the SIPs that calculate the reference prices which when crossed trigger the temporary halts, allowing an indication of price to be disseminated. For the SIPs, this role is new, complex and core to the overall performance of the LULD Plan. Therefore, it is critical that we understand the connectivity problem NYSE Arca and NASDAQ experienced last week. The functionality of the SIPs cannot be left vulnerable to any actions-or inactions-even those that are considered normal operating procedures. If it is determined that the cause, or causes, of last week’s event was not a case of “broken eggs” but rather a smoking gun for bigger issues, in particular ones involving risk to the functionality of the SIPs, then the response by our industry and its regulators needs to be decisive.