For three hours on August 22, 2013,

trading Trade involves the transfer of goods and services from one person or entity to another, often in exchange for money. Economists refer to a system or network that allows trade as a market (economics), market. Traders generally negotiate throu ...

was halted on the

Nasdaq Stock Market The Nasdaq Stock Market (; National Association of Securities Dealers Automated Quotations) is an American stock exchange based in New York City. It is the most active stock trading venue in the U.S. by volume, and ranked second on the list ...

. Trading on the exchange stopped at 12:14pm and resumed at 3:25pm, with 35 minutes left of trading for the day. One week after the trading halt NASDAQ OMX credited the freeze to an overloading of the Securities Information Processor (SIP) caused by reconnection issues with the New York Stock Exchange Arca. The freeze received substantial media coverage and generated discussions on the security of increasingly technologically advanced

stock exchange A stock exchange, securities exchange, or bourse is an exchange where stockbrokers and traders can buy and sell securities, such as shares of stock, bonds and other financial instruments. Stock exchanges may also provide facilities for ...

s. The event coined the term "flash freeze" following the earlier "

flash crash In modern finance, a flash crash is a very rapid, deep, and volatile fall in Security (finance), security prices occurring within a very short time period followed by a quick recovery. Flash crashes are frequently blamed by media on trades execute ...

" on May 6, 2010. Throughout the freeze the Nasdaq composite remained at 3631.17. Following the reopening of the market it rose, closing at 3,638.71, 1.1% higher. Shares of the Nasdaq exchange closed 3.42% down following the freeze.

Summary of events

At 10:53am

New York Stock Exchange The New York Stock Exchange (NYSE, nicknamed "The Big Board") is an American stock exchange in the Financial District, Manhattan, Financial District of Lower Manhattan in New York City. It is the List of stock exchanges, largest stock excha ...

(NYSE) Arca could not connect to the SIP after multiple attempts. Subsequently, Nasdaq declared ‘self help’ for Arca. This was revoked at 11:09am, suggesting that the issue with Arca had been resolved. At 12:14pm a technical issue impacted price quote distribution. This refers to be ability of the exchange to accurately provide prices of

securities A security is a tradable financial asset. The term commonly refers to any form of financial instrument, but its legal definition varies by jurisdiction. In some countries and languages people commonly use the term "security" to refer to any for ...

that are being traded. At 12:20pm, all trading was halted on the Nasdaq exchange. There was a subsequent trading halt placed on ‘Tape C’ stocks - Nasdaq listed

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s which may be traded on other exchanges, as quotes could not be provided for those securities. Unlike some purposeful trading halts, options trading did not continue during the flash freeze. In a statement, Nasdaq claimed that the initial cause of the outage was identified and resolved within 30 minutes and that the additional outage time was to ensure that there would be a stable reopening of the market. Test trades began at 2:45pm and trading officially resumed at 3:25pm. It was later reported that trades in ‘

dark pool In finance, a dark pool (also black pool) is a private forum ( alternative trading system or ATS) for trading securities, derivatives, and other financial instruments.Goldman Sachs Group Inc. Dark pools operated by other prominent banks and trading firms such as

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and

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were also non operational for periods of the freeze. These dark pools are not the jurisdiction of the Nasdaq or the NYSE but are reliant on accurate quotes being issued on stocks listed on either exchange and therefore cannot operate when Nasdaq stocks cannot be traded.

Cause

Prior to a public statement made by Nasdaq OMX released on the evening of August 22, there was speculation in financial markets as to the cause of the outage. Some media outlets suggested that the outage was caused by a coding error, while others speculated that hacking could have been the cause. The cause of the outage was identified as being a capacity issue with the Nasdaq SIP. A capacity assessment had been run on the SIP in January 2013 which found that each of the 50 ports in the system could tolerate 10,000 items per second, meaning the whole SIP had a capacity of 500,000 items per second. On August 22, 2013, the NYSE Arca system sent multiple sequences to Nasdaq which consumed a large amount of the system's capacity. The SIP then received quote for inaccurate symbols, the few characters which are used to represent a security on an exchange, from NYSE Arca. This resulted in the SIP generating a numerous quote rejects which further absorbed capacity of the SIP. Every connect and disconnect sequence sent by NYSE Arca to the SIP resulted in over 26000 updates, per port per second. This enormously overwhelmed the Nasdaq SIP and resulted in a system shut down to ensure fairness in the market and prevent further overloading. Nasdaq stated that the volume of activity, per port, per second, at the time of the freeze, was 26 times that of a usual trading day.

NASDAQ Response

On August 22, 2013, NASDAQ OMX released a brief statement citing a connectivity issue between an exchange participant and the SIP as the catalyst for the inability to distribute quotes. The "exchange participant", later named as NYSE Arca was not specified in the initial statement. It was stated that the initial error was identified and resolved within 30 minutes and that the subsequent outage time was spent coordinating with regulators and stakeholders. On August 29, 2013, NASDAQ OMX issued a statement detailing the causes of the trading halt, as well as admitting a degree of responsibility for the outage. The statement accredited a number of convergent issues as the cause of the outage, some of which NASDAQ OMX took responsibility for. Of these issues they stated that “we are responsible for them, regret them, and intend to take all steps necessary to address them to enhance stability and functionality of the markets.” However, the statement also placed significant blame on the NYSE Arca system as the primary cause for the outage. The statement referred to systemic technological issues and called for collaboration among market leaders to progress the systems. The statement included references to policy changes and design improvements intended to mitigate the potential for further outages, specifically citing disaster recovery, as well as to improve communication with market participants when issues arise. The Chief Executive of NASDAQ at the time, Robert Greifeld, said in an interview with ''

The New York Times ''The New York Times'' (''NYT'') is an American daily newspaper based in New York City. ''The New York Times'' covers domestic, national, and international news, and publishes opinion pieces, investigative reports, and reviews. As one of ...

'' that they did not blame Arca and the NYSE for the shutdown, instead suggesting that a broader issue with technology in the market was to blame, as well as stating that the Nasdaq shared responsibility for the issues.

New York Stock Exchange response

The NYSE refuted Nasdaq's claims that Arca was the primary cause of the outage. They took the position that Nasdaq was responsible for establishing and maintaining a system that could handle significant amounts of traffic and that a connectivity issue should not result in a closure of the entire exchange.

Industry response

Various responses were issued by US regulators and financial services firms during and after the freeze. Then Chairman of the Securities and Exchange Commission (SEC),

Mary Jo White Mary Jo White (born December 27, 1947) is an American attorney who served as the 31st chair of the Securities and Exchange Commission (SEC) from 2013 to 2017. She was the first woman to be the United States Attorney for the Southern District o ...

issued a statement following the halt saying that the matter was serious and that it "should reinforce our collective commitment to addressing technological vulnerabilities of exchanges". She also stated that a meeting would be called between the leaders of the NYSE and Nasdaq exchange to encourage efforts to strengthen the markets. In the weeks following the freeze, the SEC called for both Nasdaq OMX and NYSE Euronext to develop timelines of the freeze in order to identify the causes and areas for improvement. It was reported that the two platforms had conflicting reports of the causes and events. Nasdaq were also criticised for their lack of communication with traders and retail investors while the market was closed. Significantly, no message was sent by Nasdaq through the market feed to inform traders that the freeze had occurred. These messages are relied upon by automatic trading systems to ensure trades are not placed on markets which aren't operating, and resulted in manual shut down of trades in some firms. LandColt Capital Managing Director Todd Schoenberger was quoted as saying "The lack of transparency—we haven't heard from the Nasdaq, we haven't heard from Washington—it creates chaos and uncertainty.” Harvey Pitt, a former chair of the SEC was quoted as saying "It looked like Nasdaq was clueless about how to deal with this emergency." Media outlets reported that market participants were in communication with Nasdaq throughout the freeze, stating that there was an emphasis on ensuring the reopening of the market was without error, likely in an attempt to avoid a situation similar to the Facebook IPO. Many stakeholders believed that further issues at the reopening of the market would serve to damage investor confidence, and could lead to more substantial declines in the Nasdaq composite's value. Some finance industry commentators and participants suggested that the lack of severe market downturns following the freeze suggested that investors were becoming more understandable of the technical issues associated with increasingly automated trading platforms. Ryan Detrick, a strategist with Schaeffer's Investment Research said of the matter: "The fact we didn’t see a larger dip on today’s mess shows most investors are, for better or worse, becoming more comfortable with these mistakes." However, other commentators highlighted the widespread uncertainty that technical glitches can contribute to. CEO of JonesTrading Group, William Jones was quoted as saying "This takes confidence from the markets," as well as suggesting that traders were unsure if they could trust quotes published on various stocks, quoting his traders as asking "Are these prints real, or are they not real?".

Impact on financial markets

Unlike the flash crash of 2010, there were no significant losses in the market as a result of the trading halt.

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suggested that the impact of the freeze was mitigated due to its timing, a Thursday afternoon in mid August, as well as by its relatively short time period. Michael Farr also credited the nature of the freeze, being caused by an error between exchanges, as assisting in preventing sell offs and negative impacts on other markets such as gold. A similar sentiment was expressed by Christopher Nagy, who is quoted by

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as saying "I think people realized it’s a technology issue rather than a major news event or something that would create panic and dysfunction." However, the freeze raised further questions about the increasing risks posed by tech advances in the finance industry, contributing to potential dips in market confidence. Particularly, a number of media outlets considered the potential for targeted cyber attacks on significant trading platforms. It was pointed out by many that increased frequency of technical glitches in financial markets would decrease trader confidence, which could lead to dramatic market sell offs. While this was not the case for the August 2013 flash freeze, other technical glitches such as in September 2013, and again October 2013 can create trends. The structure of the industry was considered a contributing factor in the crash, given that miscommunication between NYSE and Nasdaq systems was the primary cause. Some journalists and financial commentators suggested that the freeze was evidence of the need for industry wide cooperation in developing emergency procedures to cope with the issues posed by high frequency trading. Democratic New York Senator

Chuck Schumer Charles Ellis Schumer ( ; born November 23, 1950) is an American politician serving as the Seniority in the United States Senate, senior United States Senate, United States senator from New York (state), New York, a seat he has held since 1999. ...

was quoted as saying that the freeze was indicative of increasing computerisation of trading firms and exchange systems, calling for regulators to consider "fundamental market structure reforms." It was reported that the

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(CFTC) intended to develop a plan to further regulate computer based trading in the wake of the flash freeze, also spurred by the Goldman Sachs Group glitch that occurred the week prior.

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that generate income through the execution of customer orders as well as proprietary trading firms were exposed to potential income loss during the freeze. Particularly given that many significant stocks such as

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, and

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are listed on the Nasdaq, the shut down caused substantial interruptions to financial firms. It was suggested by some media outlets that the decision of

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to hold their

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(IPO) on the NYSE was partially a result of the flash freeze. The issues with the Facebook IPO were also credited as a cause for this decision.

References

{{Reflist Nasdaq