The Motley Fool Previous Page

3 Things You Need to Know About Yesterday's Nasdaq Failure

Alex Dumortier, CFA
August 23, 2013

Although we don't believe in timing the market or panicking over daily movements, we do like to keep an eye on market changes -- just in case they're material to our investing thesis.

U.S. stocks opened roughly unchanged this morning, with the S&P 500 (INDEX: ^GSPC) and the narrower, price-weighted Dow Jones Industrial Average (INDEX: ^DJI) down 0.11% and 0.19%, respectively, at 10:05 a.m. EDT.

All trading on the Nasdaq exchange ceased for three hours yesterday afternoon -- a disruption unusual for its breadth and duration. Here are three things you ought to know about what happened:

It could have been worse
As I noted yesterday, Nasdaq's outage appeared to have virtually no impact on investor sentiment -- which I find quite surprising, particularly when one considers that the market witnessed another technological failure earlier in the week, when one of Goldman Sachs' (NYSE: GS) trading systems made a flurry of erroneous trades, after sending incorrect orders to exchanges operated by NYSE Euronext, Nasdaq OMX, and CBOE. According to the Financial Times, the incident could cost Goldman $100 million in losses.

It's certainly easy enough to imagine an uglier reaction; we were probably lucky the outage occurred in August, rather than October!

This type of failure will happen again
The financial markets are too dynamic and the business of financial exchanges has become too competitive to allow exchanges to err on the side of caution and conservatism. Having worked in the software industry, including in a firm that provided connectivity between banks/broker-dealers and exchanges, I can attest to the tremendous pressure organizations are under to achieve time-to-market. The priority is to "ship" software -- minor bug