Nasdaq Outage Explored: 7 Facts

What caused Thursday's Nasdaq crash?

Thankfully, the crash didn't involve an actual stock market plunge, but rather an apparent technical glitch in Nasdaq's systems that led to a three-hour outage.

Of course, those facts may not have been evident given some conjecture-filled reports on the downtime, with one noting that it "had all the earmarks" of an online attack. In fact, officials have seen no signs suggesting that hackers added a U.S. stock exchange takedown feather to their cap.

Here are seven facts to set the record straight:

1. Signs Point To Data Feed Failure

In fact, early signs are that the outage was caused by a connectivity problem involving a data feed from Nasdaq rival NYSE Arca, which resulted in price quotes not being received. Nasdaq officials told The Wall Street Journal that IT staff should have been able to manage the problem and prevent trading having to come to a halt. Obviously that didn't happen.

[ What was behind Google's recent outage? Read Google's Four Minute Blackout Examined. ]

2. Nasdaq Wasn't Hacked

While Nasdaq is still investigating the outage, forget the notion that this particular incident involved the exchange being hacked, and dismiss the suggestion -- relayed photographically by numerous stories -- that the incident happened in New York City. "Nasdaq is neither in New York nor on the Internet," said Robert David Graham, CEO of Errata Security, in a blog post.

Graham also sharply dismissed a USA Today "cybertruth" report -- "Nasdaq outage resembles hacker attacks" -- as an untruth for its suggestion that the outage "had all the earmarks" of a hack attack launched as part of the Operation Ababil distributed denial-of-service (DDoS) attacks that began disrupting U.S. banking websites in September 2012.

"While the Nasdaq market is computerized, it's not really on the Internet. There's no way to DDoS it from the Internet," said Graham. "Sure, there's a path to the Internet; many of the ubiquitous Bloomberg terminals on the Internet can eventually cause trades to happen, but fundamentally the market has its own private network. Trades can continue in the face of any sort of DDoS attack."

3. Outages Are Not Unusual For Exchanges

In the wake of the outage, Nasdaq promised to do better. "Our systems, and the industry's, have to get to a higher level of robustness," Robert Greifeld, chief executive of Nasdaq parent company Nasdaq OMX Group, told the Journal.

Such outages are far from unknown. "This is not the first time that trading on an exchange has suffered a technological problem and probably not the last time. There were other examples, such as the Flash Crash in 2010, the Facebook IPO, while Goldman Sachs was hit by a bug and there was the Knight Capital case last year," said Arie Gozluklu, an assistant professor of finance at Britain's Warwick Business School, via email. "There is speculation this is down to the number of high-frequency traders, as algorithmic trading now makes up between 50% and 60% of trades in the U.S."

The Facebook outage alone cost traders an estimated $500 million in losses.

4. Perfect Uptime Is Tough To Achieve

While stock exchange downtime may be costly and inconvenient, are outages completely avoidable? In fact, even some of the biggest names in technology aren't immune. In the past week, for example, outages bedeviled Google, which suffered a four-minute outage last Friday. And Amazon.com on Monday suffered a 49-minute blackout in North America.

5. Hack Attacks Not The Leading Cause Of Outages

Interestingly, not one of this week's outages has been ascribed to hackers. In fact, when it comes to downtime, external hackers take second billing to a host of more mundane concerns -- not just unhappy insiders, but also natural phenomenon, including snowstorms and heavy rainfall, or even the failure of a business partner's systems.

6. The Smart Money Usually Says Squirrel

Some causes of outages are more mundane, but tough to prevent. For example, one of the more embarrassing Nasdaq outages occurred in 1994, when a kamikaze squirrel triggered 34 minutes of downtime. In fact, that was the second rodent strike in less than seven years.

7. Expect Investigations And Fines

As Nasdaq continues to investigate the cause of Thursday's outage, what might happen next? Gozluklu believes the outage may lead to fines for Nasdaq -- which is a money-making institution -- and could put it at a competitive disadvantage against its largest competitor, the New York Stock Exchange. But then again, the crackdown may not stop with Nasdaq.

"Trust in the exchange is very important and the U.S. Securities and Exchange Commission are likely to push for more stringent rules to stop these system failures," Gozluklu said. "There could be fines or penalties for technological problems, but it should also take into account other players in the game, not just the exchanges."