| NEW YORK
NEW YORK The vague "connectivity issue" that Nasdaq said triggered the outage that paralyzed a large part of the U.S. stock market on Thursday originated as a problem between Nasdaq and rival NYSE Arca, a source familiar with the matter said Friday.
Nasdaq said the problem started shortly before midday Thursday and quickly cascaded through its Securities Information Processor, or SIP, the system that receives all traffic on quotes and orders for stocks on the exchange, preventing it from disseminating quotes.
The source, who spoke on condition of anonymity, said brief outages between exchanges occur from time to time but are short-lived.
In such instances, traders receive alerts from an exchange that essentially tell them to rout their order flow elsewhere for a period. Most of these episodes, which may occur several times a week, are resolved quickly.
Nasdaq did not respond to requests for additional information beyond a statement issued to traders on Friday. A spokesman for NYSE Euronext, the parent of the New York Stock Exchange and its NYSE Arca platform, denied Arca was involved.
Nasdaq Chief Executive Robert Greifeld, in television interviews on Friday, declined to identify the source of the connectivity problem.
The precise nature of the breakdown remains unclear.
But the outage, first flagged at 11:48 a.m. EDT (1548 GMT), quickly spiraled out of control and soon left $5.9 trillion of U.S. equities - more than a third of the U.S. stock market - idle for more than three hours. Shares of three of the five largest companies by market value, Apple Inc, Google Inc and Microsoft Corp, typically also among the most active in any session, were unavailable.
A number of market participants and others criticized Nasdaq's lack of an early public statement on the outage. Nasdaq did not issue a formal press release until late Thursday afternoon, well after the trading day had ended.
"As usual the communication could have been a little bit better. They could improve the communication and the amount of communication," said Mark Turner, managing director and head of sales trading at Instinet in New York.
Nasdaq CEO Greifeld said the exchange sent messages through its trader alert system and was involved in direct communication with clients.
Nasdaq's first responsibility was to assure "fair and orderly markets," Greifeld said on Friday on Fox Business Network, and exchange officials worked first to understand and fix the problem and then to communicate with the securities industry to ensure a smooth restart.
"There was active communication going on," Greifeld said.
"It has shown how horrible the crisis management side is. Communication was horrid. There is no backup. So we have to focus on the crisis management side," Mohamed El-Erian, chief executive and co-chief investment officer of Pimco, said Friday on CNBC.
In the end, even those who criticized Nasdaq for the pace of its communications, agreed the reopening of trading did go well.
Trading on Friday transpired with no apparent hiccups. Shares of Nasdaq itself, which fell 3.4 percent once trading resumed on Thursday, gained about 1.2 percent.
IN THE EYE OF REGULATORS
While worst-case outcomes may have been averted, the outage still was among the most serious in a series of recent technological failures to hit the U.S. securities business, including a software issue at the Chicago Board Options Exchange this spring that delayed the start of trading there for half a day.
It was also the latest black eye for Nasdaq, which in May agreed to pay $10 million, the largest penalty ever against a stock exchange, to settle U.S. Securities and Exchange Commission civil charges over its mishandling of Facebook's initial public offering in 2012.
The incident has already drawn the attention of regulators, and Securities and Exchange Commission Chairwoman Mary Jo White said Thursday she would like to press ahead with new market structure regulations that Nasdaq and other exchanges have resisted.
White's predecessor, Mary Schapiro, said Thursday's events are a harsh reminder of the shaky nature of modern markets.
"Events like this contribute to investors' concerns about the stability and integrity of the marketplace," Schapiro told Reuters in an interview on Friday. "I have said many times while I was SEC chairman ... investors understand they can make or lose money when they buy a stock and the fortunes of the company change. What they don't understand and shouldn't have to understand, and shouldn't be subject to, are losses based on whether the market structure is stable."
Many market participants said it was fortunate the outage occurred during a low-volume summer day.
"We were lucky yesterday," said Sal Arnuk, partner and co-founder of Themis Trading. "If the SIP failure occurred on a 10 billion share day or any high VIX, high volume day in October - where say the Fed changes policy, then I seriously doubt they, or any exchange, would have been able to re-open 2,000-plus stocks. That is a statement to the fact that we have created and allowed and encouraged an overly complex market structure."
(Writing by Dan Burns and Jonathan Stempel; Additional reporting by Rodrigo Campos in New York and Sarah N. Lynch in Washington; Editing by Lisa Shumaker and Dan Grebler)