Could this squirrel be the true cause of recent trading outages? Source: Matt Cardy/Getty Images.
Investors have witnessed several trading malfunctions in recent weeks, leaving many fretting we’ve entered the Age of Glitchy Markets (trademark pending)—a frightening new reality. But exchange outages and trading glitches are nothing new—they’ve happened since the dawn of trading, and the NYSE even publishes a list dating back to the late 1880s. Investors have managed to earn fine long-term returns along the way, suggesting folks needn’t fear the odd technical hiccup.
Kicking off the recent stint of trading shenaniganery, two weeks ago, China’s Shanghai Composite Index jumped 6% in mere minutes when Everbright Securities accidentally placed buy orders totaling 23.44 billion yuan ($3.8 billion). Closer to home, the Nasdaq experienced a “flash freeze” last Thursday when the exchange went down for several hours. Earlier this week, Israel’s Tel Aviv Stock Exchange (TASE) fell -2.5% for 5 minutes when a trader accidentally “fat-fingered” a trade, causing the price of Israel Corporation to fall from 167,200 shekels ($48,385) to 210 ($58). The Chicago Board Options Exchange also experienced problems with its market-data services Tuesday, causing delays in order entries.
Many were quick to blame technology, like high-frequency trading (HFT), decrying new-age anomalies that caused markets to crash, boom or freeze could spell disaster for markets down the road. But market suspensions and closings aren’t rare. They’ve actually happened countless times through history—and markets have still achieved long-term growth over time.
Markets have closed for many reasons over the years—technical glitches being one of them. Some are fully understandable—hurricanes, funerals of world leaders, war declarations. But let’s consider unscheduled, unplanned errors causing exchanges’ or markets’ closure.
Since August 31, 1912, the market has closed at least 15 times due to technical failures, ranging from network connectivity to ticker symbols going down. Other reasons for closures include, but aren’t limited to: lack of proper heating, too-heavy trading volume and even a squirrel. Well … make that two squirrels. Yes, on two separate occasions, while likely scampering across power lines, squirrels have created power outages, causing the Nasdaq to shut down for several hours each time. But considering markets broadly, a more common reason for unscheduled market closure than technical outage—by a significant margin—is … drumroll … too much paperwork! So much backlogged work, the NYSE has shortened work weeks and closed early for months at a time to tackle things like the Great Paperwork Crisis from 1968 – 1970.
Exhibit 1: Selected Causes of Major US Stock Market Closures
Source: NYSE; The Wall Street Journal; Photos by Getty Images.
Technology has improved the market’s functioning! Bid/ask spreads are much narrower. The market is more liquid. More trades happen, happen faster and shutdowns and outages are rarer. And just as past technological advancements have made paperwork largely obsolete, temperatures controllable and power lines more squirrel-safe, so has recent technology made markets more efficient overall. Sure, sometimes glitches happen, but the odd outage or wobble doesn’t outweigh the myriad benefits of greater liquidity and better price discovery. In the short run, these events can be unsettling. But in the long run, they’re mostly trivia.
Trading delays and glitches are inevitable. But long-term investors just shouldn’t fret such distractions. Illustrating this, when they fired the vacuum tubes back up late in the day last Thursday, Nasdaq-listed stocks rose. The outage was a mere distraction. Don’t miss a bull market because someone shouts the technological equivalent of, “hey, look—a squirrel!”