Stock exchanges
Dodgy tickers
Mar 8th 2007
From The Economist print edition
Accurate information can make—or break—exchanges
IN the absence of reliable, up-to-date information, markets go awry. The lack of accurate data—in this case, an hour-long lag in reporting the Dow Jones industrial average—dealt just such a blow to equity markets on February 27th.
The volumes on dramatic trading days mean that glitches always seem to happen when they are least welcome. The Dow's hiccup coincided with problems in an order-routing network at the New York Stock Exchange (NYSE) that led traders to jot orders on scraps of paper. Both contributed to the volatility of a session in which the Dow suffered its biggest loss in almost four years.
The NYSE was not alone. Euronext, a pan-European exchange merging with the NYSE, halted trading for about 20 minutes on February 28th as a “preventive measure” when it was hit with a surge of trades just before the close. The Tokyo Stock Exchange has suffered several big meltdowns in the past year.
Today the battle between big exchanges and newer trading venues (including all-electronic networks and regional exchanges) is increasingly fought over technology—particularly the upgrades and capacity increases needed to shave milliseconds off the response to rapid-fire algorithmic trading systems.
Some big exchanges have seen data demands double annually in recent years. This is a result of the ravenous messaging demands of customers—chat about potential buy and sell orders is increasing far faster than trades—as well as new rules (in both America and Europe) that will open established markets to competition from new trading venues. The pilot phase of a rule aimed at granting American investors more choice and a better view of the market in share-trading took effect on March 5th and is to be phased in over the coming months.
These expansions are complex, but not as impossible as they sound—either for exchanges or investors. The availability of less expensive and more scalable hardware means exchanges can add capacity more cheaply. Unfortunately for the NYSE, which has adopted a “hybrid” system that incorporates both floor-based and electronic trading, it was stuck using some older order-routing technology (due to be replaced within a few months) when the markets wobbled on February 27th.
The new opportunities for investors were illustrated on the same day. When the NYSE system faltered, much stock trading shifted to NASDAQ and alternative exchange networks, which are using the newer systems. But some of them were also slower than usual that day, a sign that they, too, must keep investing in new systems.
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