Stock market disruptions like the ones last week that temporarily shut down part of the nation’s third-largest exchange and briefly halted the trading of Apple shares are more common than investors may think.
Although traders and the public were stunned by the problems on the BATS Global Markets stock exchange on Friday, a review of industry data shows that market disruptions large and small are a daily occurrence. The frequency of the problems has rattled the confidence of some investors and companies raising money through supercharged electronic markets.
The communication breakdown that blocked trading on parts of the BATS exchange for more than an hour has been seen in at least 110 instances across the nation’s 13 stock exchanges over the last year, a review of data from Nasdaq shows. That number has gone up every year since 2007.
In one instance in January, BATS said it was unable to trade with the New York Stock Exchange for nearly 30 minutes.
Meanwhile, exchanges have halted trading in company shares after sudden spikes or falls, as happened Friday with Apple, at least 265 times over the last year — more than one for every day of trading, according to data analyzed by the Tabb Group, a market research firm. These circuit breakers kick in after stocks experience 10 percent swings in a short period of time and can be caused by a technical error or waves of electronic trading on news developments.
“These things are occurring all the time,” said Tim Quast, a managing director at ModernIR, which helps companies get access to capital markets. “We know that at any given moment something can go awry.”
The breakdown at BATS last week points to one of the worst possible outcomes. The exchange company’s own stock plunged as its shares were first offered to the public, leading the company to take the rare step of taking its shares off the market. The drop in Apple’s share price was halted because of new circuit-breaker rules instituted in 2010 by the Securities and Exchange Commission. Trading flowed on to other exchanges. BATS blamed a software error, and regulators are examining the causes.
The incident has been described by BATS and other exchanges as an example of how quickly exchanges are able to identify and fix market disruptions. But some market participants say the problems can weaken the stock market on a number of levels. When a stock’s price goes haywire, investors can get locked into bad trades, or shut out of good ones.
In addition, minor events at one exchange risk spiraling out through other exchanges and setting off a severe flash crash, like the one seen in May 6, 2010, when major markets fell more than 8 percent in a matter of minutes.
Blame for the market disturbances has fallen on the growing complexity and speed of the nation’s 13 official stock exchanges — three of which are owned by the New York Stock Exchange — and dozens of less official platforms for trading. A decade ago there were only two major trading platforms, and transaction times were measured in seconds.
A regulatory change in 2007 threw open the floodgates of competition by forcing stock trades to be routed to the exchange with the best price, as long as the exchange could act immediately. The proliferation of exchanges since then has lowered the price of trading for investors, and trade times are now measured in milliseconds. In the race for speed, however, some industry experts say reliability has been sacrificed.
“The markets basically gutted their high-cost, nonstop infrastructures for very fast, low-cost infrastructures,” said Larry Tabb, the founder and chief executive of the Tabb Group.
There is little public data available on how frequently market disturbances occur. The S.E.C. does not provide comprehensive numbers on them. Most of the information is publicized in nonstandardized form by the exchanges themselves.
Nasdaq provides some of the most complete data on how often it has encountered breakdowns with other exchanges. When BATS’s trading platform began acting erratically on Friday, the other exchanges made such breakdown declarations against BATS.
Exchanges began reporting these events only in 2007. Since then, the number of times Nasdaq has declared breakdowns at other exchanges — what market overseers call declarations of self-help — has risen each year, climbing from 96 times the first year to 139 times last year. These figures do not include the instances in which other exchanges reported problems with Nasdaq.
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