Trader Talk

Here's what's really surprising about today's shutdown of the NYSE floor

Trader on the floor of the New York Stock Exchange waiting for trading to resume, July 8, 2015.
Lucas Jackson | Reuters

Today's shutdown of the NYSE trading floor was, fortunately, a rare event.

What's remarkable isn't that there was a "technical issue" that shut trading down the NYSE floor. This has happened before on all the exchanges though this was a particularly severe example.

What's remarkable is that it wasn't really a big deal.

The problems started right at the open, when the NYSE experienced what they called "connectivity issues", meaning issues communicating orders between their customers. It was quickly resolved and did not appear to affect overall trading.

Then at 11:32 ET, the NYSE shut the entire floor down for what they called a "technical issue." Trading on Archipelago, the NYSE's electronic platform, continued as usual, as did trading in NYSE-listed stocks on other exchanges, including NASDAQ.

Trading resumed at 3:10 ET, and the all-important close came off uneventfully.

But it's what happened in between that's remarkable.

What happened was not much.

Partly, it's a reflection of how trading has changed in the last 20 years.

In the late 1990s, about 85 percent of all trading in NYSE stocks occurred on the NYSE floor.

Today, the NYSE floor is typically about 15 percent of intra-day volume in their own names.

That's progress for you.

With trading on the floor halted, volume simply moved to Archipelago, the NYSE's electronic trading platform, as well as the NASDAQ and BATS exchanges, which also trade NYSE listed stocks.

Trading desks I was able to speak with told me that institutional client flows appeared to be normal.

Total consolidated trading volume—the total trading in all stocks listed on the NYSE, NASDAQ, and BATS—was 7.3 billion shares. That's slightly higher than normal, but remember this was a day when the S&P closed down 1.7 percent. THAT by itself would cause heavier volume.

So what happened? The NYSE has declined to name a specific cause yet, but it's possibly due to a software update the night before that caused the initial problems at the open. The process of fixing that issue may have caused other software problems that eventually shut the entire NYSE floor down.

This has happened several times before, on other exchanges as well, though this is the most serious of those outtages.

How is there a "technical issue?" Here's the most likely explanation: all the exchanges are constantly updating their trading systems in order to interact with each other and keep up with new order types and trading programs. The NYSE and the other exchanges have giant "gateway" servers where the data to buy and sell stocks come into the exchange. The data is sent to "matching engines" that put all the bids and offers together, and—most importantly—communicate to the customers that the orders have been received and executed.

Sometimes, when the systems are upgraded, you get problems. For example, the matching engines could get out of sync. That's a fancy way of saying that the orders to buy and sell might not match up, or that a customer can't get a confirmation that a trade has been made.

THAT is a problem. But there's many different servers and matching engines, and sometimes there is just a problem with one or two, so small parts of the market have a problem, usually for short periods.

This, obviously, was a much bigger "technical issue" than normal, but it's still most likely a software problem.

The good news is, the SEC has just passed a new regulation, Reg NMS, that mandates that all exchanges test and upgrade their systems on a consistent basis.

The bad news is, you are not going to ever eliminate these kinds of anything, where it is stock trading, flying airplanes, or the computer systems of cars (the car glitches are coming, believe me).

That doesn't mean we shouldn't insist on the highest possible standards, and I assume the SEC is going to remind everyone of the new Reg SCI rules and demand compliance.

It just means we do not have perfect technology and never will.