Yesterday’s NASDAQ outage was perplexing to me as someone who is completely befuddled by the complex securities trading market structure. I am still waiting to find someone who can completely explain to me how the securities markets work. In detail. Down to the order type.
If this outage had happened at a futures exchange, especially one with a contract listed by other exchanges, we would have seen the volume move to the exchanges that were still trading. There would have likely also been a decline in overall volume, much like we saw yesterday, but traders would have still had a venue to hedge their risk.
To have stocks multiply listed on different exchanges, but then have a single point of failure, is the result of bad market structure design and bad regulation. In cases like this, other exchanges ought to be able to report NASDAQ-listed trades on an alternative method, whether an industry utility or their own.
The idea that these bastions of capitalism all simultaneously take a timeout when one of them has a problem seems off. Where is the competition? Where is the innovation? Where are the solutions?
The truth is that the securities markets are over-regulated. New rules mandating better technology is not going to get it done. Competition will get it done. But it will take the U.S. to create a better regulatory structure allowing greater competition for this to happen.
The markets as they are structured are too complex for the average investor to understand. I will bet the average or even above-average stock broker can’t explain the complete market structure either. I am still looking for someone who can. So if we need to simplify the market structure, we need to unleash the power of competition. Making the market more complex with more rules from the SEC will not solve our complexity problems.