Today was a very odd and frustrating day in the market. At a little after 12 pm, trading in all Nasdaq listed stocks was stopped because Nasdaq’s price quote service quit working. These stocks remained in lock down for over 3 hours until the Nasdaq finally opened the market about half an hour before the close. When the market came back, liquidity was extremely light and the spreads between the bid and ask were wide.
It is unacceptable that a stock market suffer this kind of delay. Trading volume was very light so an overload of the system can not be blamed. I think there is one very simple reason why this outage can happen, a reason that is also the root of many of the problems with today’s stock market and financial system.
It is greed.
Once upon a time, the stock markets were owned by the firms that traded on them. Brokerage houses bought a seat on the market which allowed them to make trades. The market was not a business in itself, it was a mechanism for the brokerages to do business with investors. The exchange answered to its member firms who ultimately answered to their customer, the investors.
A few years ago, the member firms sold the exchanges to the public. They cashed out and the exchanges became their own businesses. For the exchange, money is made by selling their price information, access to the market and trade commissions. The more people trade, the more money the exchange makes. This means it is not much of a surprise that the exchanges love high frequency trading because it generates a lot of fees. The exchanges charge a lot of money for high frequency traders to get the fastest access to the market. Faster than you or get, making the market unfair. But the exchanges make lots of money now and answer primarily to their shareholders who expect a profit. The lower you can keep costs and the more revenue you can generate, the more profit there is. Perhaps that is why Nasdaq has systems that break on one of the slowest trading days of the year.
I am a capitalist and I think greed can be a good motivator. I also think that myopic people can put short term profits ahead of the longer term good. One of the reasons the global banking system nearly collapsed a few years ago was because the capitalists were too focused on the short term and, as employees of publicly traded companies with little to lose, they were willing to take risks that they would never take if it were their own money.
When the brokerages owned the exchange, they insisted that it run properly because their business with investors required it. When the brokerage were owned by the people who ran the business, it was run responsibly because no one wanted to risk their wealth. Sadly, the capitalist system has forgotten that capitalists need to have some skin in the game to keep them honest. The shareholders now carry all of the risk and the shareholders do not have the ability to keep the people running the exchanges and brokerages in line. The system has become too complex.
It was not that long ago that there were just a few exchanges. If you wanted to buy Microsoft, you bought it on the Nasdaq. If you wanted to buy IBM, you bought on the NYSE. Now, there are numerous electronic communication networks and dark pools which bypass the exchange in an effort to make their owners money. The system is ridiculously complex making it no great surprise that it breaks.
I hope that today’s outage of the Nasdaq quote system does not get forgotten but instead, is used as a catalyst for change. Exchanges should not be a business, they should be a means to facilitate business. Will any change happen? As long as the financial motivations are as they are, probably not.
Despite the market being broken today, it did manage to make a good gain and show some signs that it is bouncing back from the pull back that has been under way through August. The problem is that volume is so light that I am not sure we can trust the market’s message today.
