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Knight Unhorsed And NASDAQ's Greifeld May Be Smiling
Written: August 1, 2012

NEW YORK, NY - MAY 18:  The Nasdaq board in Ti...

NASDAQ's Times Square board advertises the Facebook IPO -- just before the air came out of that balloon. 

On May 6, 2010, the Dow Jones Industrial Average took a roller coaster of an unplanned ride when it plummeted some 1000 points, only to recover within minutes. Dubbed the “Flash Crash,” this terrifying free-fall and skyrocket recovery unnerved market participants – not so much because it happened but because, even to this day, no one really has a satisfying explanation about what exactly went wrong or how to ensure that there is no recurrence.

At best, we have resorted to rabbits feet and crossed fingers (but let’s be careful, folks, about the dreaded Fat Finger). And while we have implemented a new system of both market and individual stock circuit breakers, that’s more of a hoped-for safety net rather than a comprehensive set of policies and procedures to prevent market disruptions caused by computer code corruption or server crashes.  Remember the old days when markets moved in response to news?

On March 23, 2012, BATS went batty as the Better Alternative Trading System didn’t prove to be all that better and effectively seized up during the NASDAQ morning open, prompting a trading halt. Foolishly, many thought that after the Flash Crash that this kind of market mayhem wouldn’t recur — so much for the false assurance of the regulatory bandages.

Of course, who can forget May 18, 2012, when NASDAQ’s much heralded launch of the greatly anticipated Facebook initial public offering wound up in the toilet. After taking some time to first remove the ample amount of egg on their faces, the good folks at NASDAQ seemed to concede that they weren’t quite prepared for what many viewed as the single-most important IPO launch in that electronic market’s history. The Facebook IPO crash and burn is now attributed to some software glitches – whatever that truly means.  The price of Facebook continues to drop as the talk of litigation against NASDAQ seems to rise.

Hubris 101

As the piling-on of NASDAQ grew after the disastrous opening day, who can forget the no-holds-barred criticism of NASDAQ’s Facebook IPO performance by Knight Capital’s Chair and CEO Thomas Joyce ? It was only a few weeks ago, on May 21, 2012, when Joyce appeared on CNBC “Squawk On The Street” and slammed NASDAQ:

First of all, I want to point out that this wasn’t in anyway, shape or form an industry failure. This is not a systemic issue. All of the financial services firms that were out there handling client flow handled it perfectly. This is not the first IPO that’s ever come down the pipe. They understand the process and handled it perfectly. The failure was Nasdaq’s. It was Nasdaq’s failure . . .

[T]his was a technology problem. This was like a server going down except on a massive scale and instead of stepping back and rebooting, they kept plowing ahead. . .


It must be with some devilish joy that the folks at NASDAQ watch today’s unfolding developments as Knight itself experienced severe disruption of its ability to handle and transmit orders. A situation so severe that the company’s stock is down nearly 33%. We’re told, preliminarily, that there’s a software glitch that impacted order routing. Ah yes, the ever-popular high-tech scapegoat: the software glitch!

How happy some folks at NASDAQ must be as they smile and wink at their CEO Bob Greifeld. Is he sharpening his rhetorical knives for a slice and dice job of loudmouth Joyce?  Will Greifeld soon issue a statement that Knight’s failure today is not indicative of an industry or systemic failure but simply a failure of Knight.

Let the games begin.

Mary Maalox Schapiro

When y’all done, would someone please telephone Mary Schapiro at the Securities and Exchange Commission and see if that poor beleaguered woman has any stomach lining left to handle yet another industry schoolyard fight.  And while Mary is separating all the little boys and their market toys, perhaps she will be able to find the resources to figure out why Knight melted down today — and why our markets keep getting betrayed by software glitches and trading system failures.



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