A three-hour outage of Nasdaq’s trading last week was caused by an internal software failure triggered by connection problems with rival’s New York Stock Exchange (NYSE) Euronext Arca system.
The company said its Security Information Processor (SIP) that receives all traffic quotes and orders for Nasdaq stocks had been disconnected several times from NYSE’s Arca system in the morning on 22 August, forcing the SIP to process a large amount of flawed messages.
Although the system can handle up to 10,000 messages per second, the connection problems between SIP and Arca generated more than twice this amount of messages, eventually overwhelming the system.
"The confluence of these events vastly exceeded the SIP's planned capacity, which caused its failure and then revealed a latent flaw in the SIP's software code," the Nasdaq report said.
This software flaw prevented the processor's built-in backup system from resetting properly, delaying the return of data. With the system not functioning, the exchange said it had decided to halt trading to ensure fair market conditions.
Although Nasdaq managed to solve the software problem in 30 minutes, it took nearly three hours to restore the trading. The company said they were trying to find potential design changes to make the SIP more resilient "including architectural improvements, information security, disaster recovery plans and capacity parameters."
The proposed system changes will be presented to the SIP governing committee, consisting of US exchanges and the Financial Industry Regulatory Authority, within 30 days.
"Nasdaq OMX is deeply disappointed in the events of 22 August and our performance is unacceptable to our members, issuers and the investing public," the exchange said. "While getting to 100 per cent performance in all of our activities, including our technology is difficult - it is our objective."