Computer errors rattle global stock trading systems


Published: Saturday, January 21, 2006 at 6:01 a.m.
Last Modified: Saturday, January 21, 2006 at 12:00 a.m.
NEW YORK - Computers at the Tokyo stock exchange couldn't handle a deluge of orders in the midst of a major selloff this week, and a hiccup at the Nasdaq Stock Market meant investors saw incorrect stock price movements online for much of the day Thursday.
The world's stock markets handle billions of transactions every single day, but this past week's computer problems at two major global exchanges highlights the fact that while computers are faster and more accurate than human traders, even electronic systems aren't foolproof - a sobering thought when trillions of dollars are involved.
"These events are definitely a wake-up call for the exchanges to make sure their technology is the best it can be," said David Easthope, an analyst with research firm Celent. "These kind of things can really feed a cycle that can affect investor confidence."
The Nasdaq's computer errors resulted in numerous Web sites and online brokers displaying incorrect price shifts on NYSE-listed stocks. While the prices themselves were correct, the magnitude of price movements were not, resulting in some stocks appearing to be up, when they were actually down, and vice versa.
While sites such as Yahoo and Google said Friday they did not register significant complaints from their users, the potential for an investor to make decisions using erroneous data remained. Nasdaq spokeswoman Bethany Sherman said the computer error that caused the problem was fixed.
"This kind of problem is bad, certainly, but not terrible," said Yakov Amihud, Ira Rennert professor of finance at New York University's Stern School of Business. "There may have been some confusion regarding pricing that kept some people out of the market, but at least their ability to trade wasn't impacted like it was in Tokyo."
In the second day of a two-day selloff, with Japan's Nikkei 225 index off nearly 6 percent, the heavy transaction volume prompted the Tokyo Stock Exchange's computers to shut down trading 20 minutes before the end of the session.
That left investors who wanted to buy or sell stocks, hoping to either limit their losses or pick up bargains, without the ability to trade at all. Those are the kinds of situations that can bring about a panic, experts said.
"When you have this kind of problem, it calls into question the entire system," Amihud said. "As an investor, you question whether the liquidity in that market is there, whether you can buy or sell exactly when you want to. And maybe you decide to sell off your stocks if you don't trust the system."
The Tokyo exchange's computers currently can handle 4.5 million transactions a day, which can represent up to 3 billion shares trading hands. Tokyo Stock Exchange Chairman Taizo Nishimuro said the exchange plans to boost its transaction capacity to 5 million next week and to 8 million by the end of the year.
By way of comparison, the New York Stock Exchange can handle 25 million messages per day - orders to buy or sell as well as messages and reports between traders. Anne Allen, executive vice president of market operations for the NYSE, said her testing has shown the ability for the Big Board to easily handle at least 150 million messages.
The exchange learned its lesson about the need for fast and reliable computers during the crash of Oct. 19, 1987, when the Dow Jones industrial average plunged 508 points, or 22.6 percent, and volume came to a then inconceivable record of 604.33 million shares. The NYSE already had a program in place to improve capacity, but, Allen said, the exchange was about six months behind when the crash occurred. The NYSE didn't shut down, but the system was overloaded and many traders didn't know at any given moment what the actual price of a stock was.
"Since then, of course, we've had a very aggressive capacity planning function," Allen said. "It can be almost utility-like, the demand for capacity, with everybody wanting it at the same time. You have to be way ahead, by a couple of steps."
Ultimately, no one can predict the demands on a stock trading system, Allen said, and computers aren't infallible.
"In the grand scheme of things, the Nasdaq thing is a blip, and if Japan gets its act together, then confidence will be restored there, too," Easthope said. "The average investor will get over it in time, just so long as the problems get fixed."

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