June 19, 2012 / 10:00 PM / 6 years ago

Credit Suisse: Exchanges should be liable for tech glitches

WASHINGTON (Reuters) - Exchanges should be held legally responsible for technology glitches like the one that plagued exchange operator Nasdaq OMX (NDAQ.O) during Facebook’s (FB.O) public market debut, a top executive at Credit Suisse will tell lawmakers on Wednesday.

The entrance to a Credit Suisse branch is seen in New York February 6, 2012. REUTERS/Shannon Stapleton

Dan Mathisson, the head of Credit Suisse’s CSGN.VX U.S. Equity Trading, will present his case before a U.S. House Financial Services panel on Wednesday as lawmakers explore various possible market structure reforms.

Nasdaq, which will not be present on Wednesday, is facing litigation after a technology glitch delayed Facebook’s IPO on May 18 by half an hour. In the confusion that followed, market makers did not receive confirmations of their opening orders for two hours. Some orders were lost entirely.

Nasdaq has proposed a $40 million plan to compensate clients harmed in the Facebook IPO, made up largely of trading rebates. But critics have said the plan falls short of the up to $450 million that reportedly would be needed to make all of the firms whole.

In his prepared testimony, Mathisson will say that exchanges have historically been considered “quasi-government units” because of their unique self-policing role, effectively shielding them behind “absolute immunity” when they make errors.

But in today’s world, where exchanges are for-profit ventures that are competing for market share with brokers and other anonymous trading venues like “dark pools,” such immunity no longer makes sense.

Credit Suisse’s dark pool, Crossfinder, is one such competitor with Nasdaq and exchange operator NYSE Euronext NYX.N.

“We believe that providers of trading technology will naturally exercise greater caution if they have material liability when their technology fails,” he will say. “Restoring exchanges’ moral hazard would be an important step towards creating a more reliable marketplace.”


The recent Facebook debacle at Nasdaq is helping to reignite a long-running debate over U.S. equity market structure, and whether reforms may be in order to level the playing field for investors.

For the past few years, the U.S. Securities and Exchange Commission has been studying numerous market structure proposals to ensure that some investors are not gaining an unfair advantage over others.

It has proposed, for instance, more transparency for dark pools and a “consolidated audit trail” to help regulators better track all orders, messages and trades.

It has also publicly debated various potential new rules for high-frequency traders, whose lightning-speed trades help them earn thin profits from market imbalances.

Market structure reforms gained momentum with the SEC after the May 6, 2010 “flash crash,” which briefly wiped out $1 trillion in equity and left investor confidence shaken. The SEC moved to impose circuit breakers and clarified rules governing erroneous trades.

But the SEC’s pace on market structure reform has slowed considerably as it continues to tackle a daunting workload heaped onto the agency by the 2010 Dodd-Frank Wall Street reform law.

At Wednesday’s House Financial Services hearing, brokers, exchanges, banks and other market players plan to examine how SEC regulations designed to help fuel competition should now be re-explored as trading has gotten faster and more fragmented.

Among the topics expected to generate debate include whether or not the SEC should adopt a “trade-at rule,” which would prohibit U.S. venues and wholesale market makers from executing an incoming order unless they were already publicly displaying the best bid or offer in a particular stock.

Reporting By Sarah N. Lynch and John McCrank; Editing by Phil Berlowitz

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