System Logic Discussion of Technology Issues at Nasdaq (with Lofchie Comment)
On May 29th, the SEC issued findings and imposed a ten million dollar fine against Nasdaq as a result of Nasdaq's technical problems in connection with the Facebook IPO and Nasdaq's responses to those problems. Chris Clearfield of System Logic will undertake a series of articles that examine the technical details of the error, NASDAQ's decision-making, and the broader implications, from the standpoint of technology and processes around technology, of the SEC's findings. The first such article, which discusses the core technology problem that led to the other problems is linked to below.
Lofchie Comment: From a legal standpoint, Mr. Clearfield's description of the initial events raises a number of regulatory policy and compliance process questions.From a regulatory policy standpoint, the first question is, whether there is anything in the above description that would call for a disciplinary action or is it more a simple matter of "stuff happens"? One of the concerns that with our current regulatory and enforcement process is that there seems to be a need to bring an enforcement action in response to every material problem. Businesses that make mistakes have to fix them; it does not necessarily follow, however, that the mistake was itself a violation of law unless the law has been defined to prohibit the making of all mistakes. From the standpoint of compliance, there are two difficulties in designing a process that would have caught an error of the type that Mr. Clearfield believes was embedded in the system for years. Given that the crossing system worked consistently over a prolonged time period, each successful operation of the system would have been regarded as a successful "test" in actual practice. This raises the question of what reasonable further testing should have been required? Second, an additional test of the Nasdaq system in advance of the IPO would have required, at a minimum, input from a number of different participants that might not have cause to interact this way within the organization: i.e., the business people who would have had to anticipate that the Facebook volume would far exceed any prior experience or the technology professionals who would have had to anticipate that a massive increase in trading volumes would cause delays. In the ordinary course, it is not clear that these groups interact and, even if they had, it is certainly not obvious that either could have or should have anticipated these issues given prior experience. Query, how does a firm build a compliance process that can anticipate issues of the sort that arose in the Facebook IPO?
Click here for System Logic article on Nasdaq.See also: Nasdaq Charged for Failures during Facebook IPO.