Still no final word on what happened with the Nasdaq failure Thursday, but there are plenty of recriminations.
Recall that the SIP (security information processor), the network that carries the quotes and trades for the Nasdaq, failed at 12:15 a.m. ET and wasn't fully operational until roughly half an hour before the close.
The Nasdaq has implied that the problem started when Arca, the NYSE's electronic trading system, had connectivity issues with Nasdaq's SIP. One of the matching engines at Arca that controls about 300 stocks went down briefly, and when it restarted it had trouble connecting. A matching engine crosses buyer and seller trades on exchanges and dark pools.
Between 10:53 a.m. ET and 10:55 a.m. ET Arca attempted to reconnect to the SIP approximately 30 times but failed to do so, according to the Nasdaq.
The Nasdaq declared "self help" against Arca (indicating it was having problems with the data feeds) at 10:57 a.m. ET. It revoked "self help" at 11:09 a.m. ET, indicating the problem was resolved.
But, Nasdaq said, the SIP continued to have problems. Regardless: at 12:15 p.m. ET, the exchange shut down the SIP.
What happened between 11:09 a.m. and 12:15 p.m.?
After doing a post-mortem Thursday night, the Nasdaq has implied that the constant attempt of Arca to reconnect to the SIP was a part—but not the only part—of the problem. The number of reconnection attempts is unusual, it said.
Why was this an issue? The Nasdaq said the multiple attempts tied up memory resources ... disconnect, reconnect. ... The first attempt to connect kept the data in place, and every time Arca tried to reconnect it took up more resources, until, eventually, it overloaded the SIP.
Nasdaq officials say the SIP was not designed to such multiple connection and reconnection attempts.
NYSE officials are stunned by the accusation that they may have played a significant role in the outage and imply that if there is a problem, it's a design flaw in the SIP.
The NYSE's position is that it's the Nasdaq's job to build a system that works properly and that there's no way that a connectivity issue should have caused the system to melt down, period. Minor connectivity glitches are fairly routine, and it doesn't matter if Arca tried to reconnect once, 30 times or 100 times. It should not have brought down the SIP.
The only thing both sides seems to agree on is that something depleted the SIP's resources and crowded out the system.
NYSE officials are upset that the Nasdaq is trying to blame them, even in part. They say it is simple: The Nasdaq couldn't handle its queue of messages. The SIP's error recovery mechanism was not built well.
What's next? The Securities and Exchange Commission has set a meeting for Sept. 12 to try to sort this out. It has asked both exchanges to determine an event timeline.
Obviously, some disagreement exists.
What needs to be done? There is a committee for the SIP, which consists of some 15 members, including the exchanges and the major broker-dealers.
There are several issues that the SIP committee and the SEC will be taking up.
First, the Nasdaq clearly needs to suggest how the SIP can be improved. It is likely to say that it should have have the right to simply shut down access to the SIP if there's a problem, rather than shutting down the SIP itself.
Second, Reg SCI will be more fully explored. Reg SCI is a series of regulations that will require the exchanges and broker-dealers to implement uniform testing standards. Aren't there uniform standards in place already? No. Right now there are only standard "best practices" that mandate vague guidelines.
This is the quickest and most logical way to deal with this issue, but the exchanges have pushed back against it, largely because of cost. The comment period has closed, and the SEC is now reviewing the comments.
What is the agency likely to say about all this? My guess is that the SEC will tell everyone that systems like the SIP are a critical part of the trading infrastructure. It needs to be more robust. Whether it went down because of a connectivity issue between Arca and SIP is beside the point. Make it work better. And push hard for Reg SCI to be implemented.
Here's a bigger problem: The stock trading business is terrible. It's low margin and low profit. It's so crummy that two exchanges—Direct Edge and BATS—are merging. It's so crummy that there will likely be more layoffs at the NYSE after the NYSE and ICE merge.
My point is that these exchanges have fewer resources just when the SEC will most certainly be requesting that they devote more time, people and energy to shoring up the market's technological underpinnings.
You are putting a potentially expensive mandate on top of an already shrinking industry. That economic pressure will likely drive even more consolidation.
—By CNBC's Bob Pisani