Ask The Experts: Are Stock Market Glitches Something to Worry About?

On August 22, trading in more than 2,700 NASDAQ stocks came to a screeching halt. A glitch in the system halted trading for several hours.

Rewind to May 18, when Facebook launched its much-anticipated IPO. Again, a glitch on the NASDAQ stock exchange delayed the start of trading. Even after trading began some orders didn’t get through. Traders were outraged and the IPO was pretty much a flop.

Even the New York Stock Exchange has not been immune to technical problems. On May 6, 2010 the exchange suffered what was called a “flash crash.” Due to a technical glitch, the Dow Jones Industrial Average plunged more than 1000 points in a matter of minutes, only to recover minutes later. But investors who had entered stop-loss orders – orders to sell a stock if it fell to a certain price – lost big.

Technology Rules

Technology rules everything these days, even financial markets, but when it fails there can sometimes be a big price to pay. Is this something to worry about as we go forward? Most of the experts we consulted don’t think it is.

“Personally, I am not worried about it,” said David Vang, professor of finance at the University of St. Thomas.  “The volume of dollars transacted daily is so significant that such trading platforms and exchanges have a huge incentive to fix things ASAP once things come to light.”

With the glitches so far, it has mostly been day traders and hedge funds that have taken the biggest hits. If you have a sizable stock portfolio in your retirement account, should you be concerned? Not really, says Raymond P. H. Fishe, professor of finance at the University of Richmond.

“These are mostly buy-and-hold accounts, so they have horizon's beyond the effects of temporary platform glitches,” he said.

Restoring Confidence

Are there things the markets can do to shore up confidence? Maybe, but is that truly the right question to focus on?

“The question is really what can regulators do to restore confidence?” said Michael D. Goldberg, economics professor at the University of New Hampshire. “They need to play a much stronger role than they have.”

Bryan Routedge, associate professor of finance at Carnegie Mellon University, agrees but thinks the exchanges should all work to make trading cheaper and more efficient. When it comes to markets, he has bigger worries.

“The much larger thing to worry about, at least to me, is risk to the economic fundamentals that drive prices,” he said. “I am not pessimistic here.  I am just pointing out that ‘confidence that the market can execute trades’ is much different than ‘confidence that equity prices will rise.’"

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