Nasdaq said it halted trading for three hours Thursday after a "connectivity issue between an exchange participant" and a system that disseminates all stock prices for the industry.
According to Nasdaq, the problem "led to a degradation in the ability of the SIP to disseminate consolidated quotes and trades."
Nasdaq did not identify which exchange had the issue connecting with the Securities Information Processor, also known as SIP.
In its statement, it did say the "cause of the issue has been identified and addressed."
Nasdaq said once it became aware of the problem, it halted trading in all Nasdaq-listed securities to "protect the integrity of the markets."
The SIP's technical issues were resolved in the first 30 minutes, Nasdaq added. The remaining time was needed to coordinate with other exchanges, regulators and market participants for an "orderly re-opening" of trading.
Despite the freeze, Nasdaq said that it would not cancel orders.
(Read more: Nasdaq shutdown: Follow the software)
SEC Chair Mary Jo White said in a separate statement the "serious" interruption underlines the need to address "technological vulnerabilities."
The exchange closed at its normal time of 4 pm ET. Despite the troubles, stocks closed slightly up for the day.
(Read more: Nasdaq shuts down, but stock market shrugs it off)
There were reports Thursday morning that NYSE Euronext was telling traders its electronic exchange Arca was having technical issues with some Nasdaq-listed stocks. Nasdaq stopped routing orders to Arca temporarily, but reportedly the issues were resolved before Nasdaq halted all trading.
Nasdaq officials would not comment when asked if the "exchange participant" that had the "connectivity issue" was Arca. The NYSE also had no comment.
Once Nasdaq resumed trading, there were some technical issues when Arca went to reconnect, an NYSE spokesman said. He made the comment in response to a question before the latest Nasdaq statement.
The shutdown brought sometimes vehement criticism from across Wall Street.
"This is such an embarrassment to the entire financial community. To have the Nasdaq go down as it has; to be down three hours—it's one thing to be down for five minutes—to be down for three hours is absolutely inexcusable," said Dennis Gartman, editor and publisher of The Gartman Letter.
(Read more: Cramer: We need a disaster plan, now!)
"It reminds me of sitting at the US Airways terminal and hearing nothing from nobody and you're getting angrier by the hour," he said.
Former SEC chairman Harvey Pitt told CNBC: "It looked like Nasdaq was clueless about how to deal with this emergency."
"Nasdaq has, in my view, serious issues and there are two particular problems here. The first is, is there technology up to the task. That's number one and then the second is, that when technology goes bad, do they have an established crisis management program?," Pitt said.
(Read more: Recent market delays due to technical glitches)
Within an hour of the shutdown starting, the Nasdaq options markets issued a "system update" saying they were recommending firms route all open orders elsewhere. An average of 1.6 billion shares have been traded on the Nasdaq every day this August, according to statistics from Sandler O'Neill.
The New York Stock Exchange halted trading in all Nasdaq securities at its request and canceled orders. The NYSE otherwise declined comment. The CME said it saw 'no impact' from Nasdaq's trading halt.
(Read more: 'Knight-mare': Trading Glitches May Just Get Worse)
"You can't trade if you can't get the quotes out," said Rich Repetto of Sandler O'Neill Partners.
"If I was back in the days of 10 years ago managing 300 traders I'd put the directive out to every one of them 'we don't put any orders in at the open' ... no one trades for 60 minutes," said Joe Terranova, chief market strategist for Virtus Investment Partners and a CNBC contributor.
The shutdown of exchanges without an external crisis is rare, but a stray squirrel shut down the Nasdaq in 1987, according to the New York Times.
- Written by CNBC's Matt Hunter and Alex Crippen. CNBC's Patti Domm and Reuters contributed to this report