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January 1, 2000

Trouble in Trumbull? Nasdaq is facing one of its toughest challenges since its inception in 1971

By Peter Chapman

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  • Trouble in Trumbull? Nasdaq is facing one of its toughest challenges since its inception in 1971
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On November 17th, during the last 20 minutes of trading on a day that saw record volume, Nasdaq's SelectNet system crashed. It was a black eye for Nasdaq, but a bonus for the ECN community.

"We had one of our biggest volume days," said Sydnie Kampschroeder, an executive with Chicago's Archipelago ECN. "And since we route orders [that don't execute in Archipelago] to Island and Instinet our customers had the benefit of those two large pools of liquidity as well."

The incident highlights a festering problem at Nasdaq. Its systems are creaky and it's losing market share to alternative trading systems. Electronic communications networks, with the help of portal technology from Austin, Texas-based, New York's and others, account for about one-third of Nasdaq order flow. Analysts see that figure rising to 50 percent in a few years.

Many are questioning whether Nasdaq has the technological wherewithal to be a player in an increasingly electronic environment.

"[Frank] Zarb is running around the world forming this alliance and that, and all the while Rome is burning," said Robert Wood, a finance professor at the University of Memphis and an expert in market structure. "He ought to park on Trumbull's doorstep until that thing functions the way it should."

Home Base

Trumbull, Conn., is home base for the two-part Nasdaq system. Tandem mainframes support four trading services: SelectNet, SOES, ACES, and CAES.

Unisys mainframes pump out quotes to traders and media outlets. Both services malfunction during bouts of heavy trading, especially at the open and the close.

One problem is a delay in the reporting of last sale prices. According to Gregor Bailar, chief information officer for the National Association of Securities Dealers, which runs Nasdaq, the problem is a bottleneck in an interface linking the Tandem complex with the Unisys machines. Bailar says Nasdaq is phasing in an upgrade that will double capacity on that interface.

Some say this is more an annoyance than a money issue. What really aggravates market makers are persistent delays in the reporting of SelectNet trades.

"Because of [Nasdaq's] delay in processing an order and its execution it could be minutes before I see at what price I actually bought or sold a stock," snapped a trader at a large shop. "How do I make markets if I don't know what I bought or sold?" The Security Traders Association says the SelectNet problem can cost trading rooms thousands of dollars in position losses.

Bailar says relief is just around the corner. "By the end of January we will have replaced our single-switch mechanism for transmitting SelectNet reports with a multi-switch unit," he explained. "You will see a direct impact." A multi-switch gives Nasdaq that all-important "scalability," or the ability to ramp up its processing power to cope with surges in volume.