The New York Stock Exchange (NYSE) found itself a little quieter close to noon today when its order-matching system decided to head to the Hamptons a few hours early. The string of notifications from NYSE (which will move to the archive; click the plus sign next to “Archive of System Status Notifications”) show that the first signs of trouble showed up about a quarter to 11am, and by 11:40am trading in the 242 affected stocks had been halted on NYSE while their tech staff did a server switch. Trading resumed about a half-hour later, according to reports from Bloomberg.
I was actually at my desk today watching the markets and my open positions when the news came across CNBC. Now, the cool thing about NYSE is that it’s a hybrid market; while the main floor of the exchange is quiet compared to just a few years ago, it is still notable for its combination of human and electronic trading. Trades can go through the NYSE system, where humans (specialists) handle the trades, or through NYSE Arca, formerly Archipelago, an electronic trading platform purchased by NYSE several years ago. In today’s outage, the computer systems that support the regular NYSE system glitched. And since there are multiple over-the-counter platforms like NYSE Arca, trading continued as normal in the electronic world. If one part of NYSE goes down, there’s an alternate platform to temporarily take its place.
What makes this interesting? First, the speed of the server switchover. According to Steve Grasso, one of the NYSE floor traders who regularly contributes to CNBC, most of the delay was caused by specialists having to redo what’s called “price discovery” — the process of collecting bids and offers on a stock to find the equilibrium price, hence “discovering the price” — which usually only happens at the market open. (This is why if you’ve ever followed stock prices at 9:30am, it can take some time to get a quote on NYSE listings.) Obviously NYSE’s tech staff know how to throw the switch quickly, if you will, but it’s pretty impressive that outages of this magnitude happen so infrequently on an infrastructure designed to handle anywhere from 8 to 10-billion shares of volume in a day.
Second is the paradox of the hybrid system. Grasso praised NYSE’s acquisition of Archipelago as a way to avoid a total halt of floor trading. He pointed out the opposite, too; if NYSE Arca went down, the “old” human system meant that trading on NYSE could continue. Sure, it might mean the specialists can’t push through as many shares, but as Grasso pointed out, computers suck when it comes to price discovery; the spreads on NYSE tend to be better than on electronic markets like NASDAQ. I don’t have a source handy but I remember some articles and analysis a few years back supporting those claims. Yet this hybrid system of man and machine is, under the hood, really machine and machine. It’s possible for specialists and traders at NYSE to work without computers; again, a few years ago, I remember them resorting to whiteboards and pen and paper for some reason. (Some of the stocks didn’t get a 4pm print until 4:20pm, and people were still doing settlement paperwork past 5pm.)
So, if a technology failure in something like SuperDOT or Matching Engine results in a trading halt, can you really call the floor system a human alternative to electronic trading?
