The Securities and Exchange Commission cannot let stand the Nasdaq OMX Group's bungled handling of its late-August trading outage, former SEC Chairman Harvey Pitt told CNBC. He spoke before Thursday's meeting between federal regulators and the chief executives of the major stock exchanges.
"What was shocking about the recent Nasdaq outage was the fact that it was the second such incident in very short period of time for Nasdaq," Pitt said in a "Squawk Box" interview. "It seemed as if there was no crisis management plan in action, and there had been not effective planning for that event."
Mary Jo White, the SEC chairwoman, scheduled the Thursday forum two weeks ago to address the Aug. 22 computer trading glitch that effectively shut down the Nasdaq stock market for more than three hours. The problem was in the public data network that carries the quotes and trades for Nasdaq, known as the Securities Information Processor (SIP).
"When this broke, Nasdaq didn't even tell the CEOs of its listed companies until much later, until they read it in press reports what was going on," said Pitt, who served under President George W. Bush. "When it ultimately restored trading, it restored trading in some stocks before others. This creates all sorts of disorganization in the markets and is chaotic. The SEC can't let that stand."
In a Wednesday blog post, CNBC's Stocks Editor Bob Pisani looked at what the SEC hopes to get out of the closed-door meeting:
The SEC wants to make sure there are adequate back-up capabilities for both the Nasdaq SIP and the corresponding public feed that the NYSE runs. Believe it or not, they both run on different "silos." Neither one can talk to the other. Expect discussions on how they can both effectively become backups for each other.
Pitt echoed those sentiments, "You can't avoid technology glitches, but you can anticipate them and be prepared to deal with them."
CNBC's Pisani continued by rising a couple of questions about what should happen in the event of future computer problems:
Under what circumstances should the entire market be halted due to trading glitches? Under what circumstances should trades be broken, particularly in derivative businesses, like options?
In a closed session on Tuesday, White provided an update on the Nasdaq trading halt to the Financial Stability Oversight Council, a panel of regulators established by the Dodd-Frank Wall Street Reform law.
The council polices the market for emerging risks—such as technology failures, natural disasters and cyberattacks—and empowered to pressure other regulators to take any necessary action.