It’s Time to Fix the Stock Machines

Stock trading last month on the NASDAQ was halted for several hours due to yet another computer glitch at the world’s second largest stock exchange.

And then, it happened again on Wednesday, when a malfunction of a price feed overseen by NASDAQ created another trading halt.

The issue this week was resolved within minutes, not hours, according to a report by Whitney Kisling of Bloomberg. It led to a temporary halt on transactions of a limited number of stocks as opposed to the thousands of stocks that screeched to a halt on August 22.

Regardless of the number of stocks affected or the length of the market breakdown, NASDAQ’s faulty trading systems is a cause of great concern for both large institutional investors and moms and pops across America.

“’We are not inspired by the fact that this has become a recurring issue,” one institutional investor told Bloomberg’s Kisling. “This type of thing does an awful lot to kill investor confidence in the markets.’”

The Securities and Exchange Commission said on Wednesday afternoon it was in contact with the NASDAQ OMX Group after the brief outage in the system that was at the heart of the three hour shutdown in August, according to a report by Reuters.

This recent NASDAQ debacle reminds investors of the fragility of the electronic guts of the global stock trading system where investors pour pension and college savings money.

Indeed, the NASDAQ breakdowns follow almost a litany of other technology failures on Wall Street. Those include the recently botched Facebook IPO, the May 2010 flash crash and, most recently, Goldman Sachs flooding the U.S. options market with a number of unintended computer-driven trades in companies such as JPMorgan Chase and Kellogg Company.

The problem is so dire that a leading figure in Wall Street finance, Myron Scholes, said last month that Goldman Sachs and other big banks should be forced to incur huge losses if they make trading errors. The current industry practice simply allows Goldman and other banks to cancel those trades, walk away virtually unscathed regardless of the potential damage done to individual investors holding the securities.

“’If trades are not cancelled, and Goldman and others internalized all of the losses associated with program errors and bad algorithms, they would be more careful,’” Scholes told Financial Times reporter Neil Munshi.

It’s high time the technicians of Wall Street watch the machines to insure that the markets function properly. Investor confidence is suffering each time NASDAQ or Goldman Sachs computers blow up well-designed trading strategies for individual investors.

At the very least, the NYSE and NASDAQ, along with their partners at the leading Wall Street firms, need to agree on some protocol for compensating victims of technology glitches. That would allow the ordinary investor to once again have some degree of confidence in the markets. The regulators must police the computer-driven trading which seems to profit at the expense of ordinary investors.

Such action by the regulators would begin to shore up investor confidence in what is now a completely technology-driven stock market.

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