Additional reporting by Adam Samson
The day after the New York Stock Exchange was shut down for nearly four hours, questions linger about what exactly happened and why there seemingly wasn't more of an impact on financial markets. (Yes, the Dow fell 261 points, but it was an orderly decline and largely attributed to other factors such as China's market swoon and ongoing concerns about Greece.)
The answer to the latter question is simpler and more direct: The NYSE is no longer the center of the American stock market. Technological advances and SEC rule changes compelling brokers to seek "the best execution" for customers across various markets, most notably Nasdaq and BATS, have sent the Big Board's market share of U.S. stock trading down to about 20% today versus 80% a decade ago, according to The Wall Street Journal.
That said, the NYSE maintains a critical role in setting the opening and closing prices for NYSE-listed securities.
"This is the primary market for over 4,000 issues, and as such, the NYSE is the ultimate price for each of those issues," Keith Bliss, a veteran floor trader at Cuttone & Co. explains. "Traders and investors need to know on a nightly basis the closing mark for their holdings to calculate P&L, set the benchmark price (if they manage their performance on that level), and help in evaluating strategy."
Closing prices for mutual fund prices are also dependent on the closing auction at the Big Board so the NYSE's ability to reopen before the close on Wednesday helped prevent the outage from causing more upheaval, potentially spilling into Thursday's session.
Bliss noted the NYSE was motivated to reopen before the close because "most volume comes in that time, so they wanted the business" and "to reassure the market participants that all was well."
Despite the market's recovery on Thursday, it's hard to say market participants are reassured. Wednesday's outage revived the concerns about market integrity that insiders have cited for years and the broad public became aware of after the 2010 'Flash Crash,' when the Dow tumbled nearly 1000 points in a few hair-raising minutes.
Remain calm, but all is not well
Which brings us back to the "what happened?" question.
On Wednesday, the NYSE attributed the shutdown to a “configuration issue” and a NYSE spokesperson declined to offer more specifics on the glitch.
Midday Thursday, the Exchange posted an alert to traders which attributed the outage to "a software release" that caused "communication issues between customer gateways" and the trading unit employing the system, leading to "unusual system behavior" that prompted the exchange to suspend trading at 11:32 a.m. ET.
NYSE began by rolling the update out to just a single trading unit. But as customers started connecting to the system Wednesday at 7 a.m. ET, they were hit with “communication issues” between customer gateways and the trading unit with the new software. NYSE determined the gateways were not loaded with software that was configured to properly interact with the new software.
The Big Board updated the software ahead of the opening bell in New York, but customers faced additional communication issues, which “began to manifest themselves mid-morning.” NYSE – the exchange’s main platform that is connected to its iconic trading floor at the corner of Wall Street and Broad Street in New York – and the smaller NYSE MKT, were still trading, but customers were reporting “unusual system behavior.” By 11:32 a.m., the decision was made to halt trading across the two markets.
With trading halted, NYSE was able to switch-over to back-up trading units located in a data center in Mahwah, New Jersey. Then, in consultation with regulators and other industry participants, NYSE began a complete restart of both of its systems.
Trading in NYSE MKT’s primary listings came back online at 3:05 p.m., while NYSE and NYSE MKT Tape C resumed trading at 3:10 p.m. ET. The important closing auction – which sets the official price for NYSE-listed securities and serves other important purposes for other financial players – commenced as usual.
The incident was the biggest such hiccup since the so-called Nasdaq Flash Freeze in August 2013, in which a “combined series of technology events” halted trading on the all-electronic Nasdaq Stock Market for about three hours. That event was different in that trading was halted in Nasdaq-listed securities, like Apple (AAPL) and Microsoft (MSFT). NYSE stocks continued trading during Wednesday’s halt, and, indeed, NYSE’s electronic ARCA market remained open for trading the entire day. NYSE ARCA options and AMEX options markets also remained functional throughout the day.
A bad day for Wall Street
Still, the NYSE's explanation didn't quell concerns that something more nefarious might be afoot.
Despite statements from the Department of Homeland Security and the NYSE to the contrary, Barry Habib, Founder and CEO of MBS Highway, was similarly concerned about the Big Board being the target of a hack-attack.
"I'm wondering if this was a test," he says, noting the confluence of computer glitches on Wednesday. "If I were a bad person, or bad group and wanted to do something, I'd want to test it out before I took big step and see what reaction would be [and] hope the opposition would show its hand and then gear up for big move."
Habib, among observers, noted a Tweet Tuesday evening from YourAnonNews, one of many unofficial accounts linked to the hacking group Anonymous, which read: "Wonder if tomorrow is going to be bad for Wall Street.... we can only hope."
But perhaps that's too conspiratorial for you so let's end on a lighter note. Other than the issue of the closing auction, yesterday's session revived questions about whether the NYSE really matters anymore, at least in its physical form. Yahoo Finance asked a handful of source what they think will become of the iconic NYSE building in lower Manhattan over the course of the next 20 years. Here's a sample of replies:
- Very high end lofts… or artists studios. I have watched as the once great trading floors in Chicago and Kansas City have closed only to watch as volumes have increased and liquidity...in most instances...remains enormous. Oh, there are problems from time to time, but day-in-and-day-out, the fills are better; the public is better served and the beat goes on. - Dennis Gartman, Editor/Publisher, The Gartman Letter, L.C.
- NYSE = Bowling Alley -- Barry Ritholtz, Ritholtz Wealth Management, The Big Picture blog
- It will still be the NYSE. -- Jeffrey Saut, Raymond James
What do you think? Let us know in the comments section below.