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TheStreet Open House

How to Navigate the Next Market Malfunction

NEW YORK ( TheStreet) -- The big story Thursday was the halt in trading on the Nasdaq stock market, an event that already has been dubbed the "Flash Freeze."

For now, Nasdaq OMX (NDAQ), which runs the exchange, is blaming the shutdown on a problem with the Securities Information Processor, the system that collects and disseminates the price quotes that drive trading.

This is a developing story, and we don't know all the details yet. Although the exact cause for yesterday's outage remains uncertain, one thing is certain: There will be more glitches in the future.

That means individual investors should gird themselves for the next one.

Yesterday, on CNBC, just about every segment included a question about how investors should trade around the halt.

Although there was a wide range of responses, the best thing for the average investor to do is to avoid trading around -- and during -- a market outage.

That's because a shutdown or other technical glitch on an exchange could leave an investor stuck in an "erroneous" trade that is forced to stand.

In the 1990s I worked at Charles Schwab (SCHW) in an area called trade support that fixed trading problems.

This was back in the early days of online trading, and the company Web site used to go down all the time. Even though we warned customers that they might not know for hours whether their orders were placed or at what price, many customers still went ahead and placed them.

So an investor could have found herself in the position of having submitted a buy order early in the day without receiving a trade confirmation. Then the stock price could have slumped 10% from when she placed her original order, but she wouldn't know whether her order was filled, or whether it was filled at her intended price or at the cheaper price. Wouldn't you want to avoid being in that position?

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