Making Markets Work
What if the market stopped and nobody noticed?
Photo: Nabeel Syed. Source: Life of Pix
That’s what happened last Wednesday. Between 11:30 am and 3:00 pm, no trades were processed through the New York Stock Exchange. But apart from awkward TV images of traders standing around staring at blank screens, almost nothing changed. Shares kept changing hands. There was no trading halt. Anyone who wanted to sell or buy Alcoa leading up to their earnings announcement could do so.
This wasn’t your father’s shutdown, or even your older brother’s market freeze. Even though the iconic NYSE stopped trading, there are 10 other official venues where people can buy and sell shares. And there are dozens of unofficial exchanges—dark pools. These exchanges are simply computers running software to connect buyers and sellers. And when the NYSE’s computer froze because of a failed software upgrade, the other exchanges picked up the slack without a hitch.
Over 7 billion shares changed hands on the official exchanges, with a flurry of trading at the close. This was less than Tuesday’s volume, but more than Thursday’s. The pace of trading was steady. There wasn’t even a hiccup around 11:30 when NYSE’s platform went down.
People worry about the market’s structure today: it’s fragmented and hyper-fast. Millions of dollars are being made via economically useless activities, like running fiber-optic cables from New Jersey to Chicago to gain a few microseconds in order to arbitrage the system. But last week that fragmentation worked. The little “N” on a consolidated data feed that represents the NYSE was replaced by some Ts and Ys and Ks.
All these competing exchanges give us a resilient system. In markets, as in much of life, it’s not the biggest and the strongest that survive, but the system most adaptable to change.
Douglas R. Tengdin, CFA
Chief Investment Officer