NYSE, Nasdaq Play Blame Game

NEW YORK ( TheStreet) --- The finger-pointing continued Friday between the Nasdaq Stock Market and the New York Stock Exchange in the wake of Thursday's 1,000-point intraday stock market plunge -- despite calls from both sides for a stop to all blame-finding.

At its essence, the spat is just the latest iteration of an ancient debate in the trading world, one that most people had thought was long ago put to bed: human beings vs. electronic trading.

This time around, following the historic oddity of the trading action of the prior session, NYSE Euronext ( NYX), the parent of the New York Stock Exchange, suggested that its hybrid computer-human system could have prevented yesterday's mayhem if it weren't for Nasdaq, which continued to trade those stocks, allowing the floors to drop in them.

For its part, Nasdaq OMX Group ( NDAQ), parent of the world's most famous electronic exchange, said the very hybrid nature of the NYSE was the root of the problem: Had electronic trading been allowed to continue apace in the handful of stocks behaving so crazily, markets would have operated in orderly fashion.

There was talk from both sides -- which are locked in a widely watched battle for market share, not just in the U.S. but around the world -- about the need for establishing universal circuit breakers for each individual equity listing that all exchanges would honor. When the NYSE halts electronic trading in certain stocks, the buying and selling can move to other exchanges, including those operated by Nasdaq.

Both the Big Board and Nasdaq also announced they will cancel trades in stocks that moved 60% or more during the height of Thursday's bizarre downdraft.

So far, amid all the talk of fat fingers typing "billion" instead of "million" and high-frequency traders turbo-charging the selloff, little has been sorted out, and the root cause of the glitch remains a mystery.

The two exchanges met with officials of the Securities and Exchange Commission on Thursday after the bell, and, in Washington, congressional hearings have been scheduled for Tuesday to address the mess, which will assuredly impact the financial-system reform debate ongoing in the Senate.

Meanwhile, stocks continued to trade hectically Friday on heavy volumes. The Dow Jones Industrial Average slid by more than 200 points, falling into the red for 2010, with traders unhinged by the notion of Europe's solvency issues spreading across the Atlantic.

Appearing on CNBC Friday morning, Nasdaq CEO Bob Greifeld had some stinging criticism for the NYSE. "When you have the primary market -- the listing market -- deciding not to support the stock, to not trade it, to stop trading, that's sending ... a negative signal that there's something wrong with the stock," he said. "So instead of standing behind it, they basically walked away from that. It's equivalent to what happened back in the day when we had telephone markets, where traders didn't answer the telephone to incoming orders."

NYSE chief Duncan Niederauer then went onto the financial news channel to defend his organization.

"I got two observations to Mr. Greifeld's comments," he said. "One is, let's stop the finger pointing. This is about trying to move the ball forward, so let's try to be constructive. Number two: Let's just be clear about what the facts of what happened yesterday were. There's no walking away, there's no abandoning our obligations. We've had a market model in place for years that includes exactly what Bob is advocating for, which is a circuit-breaker, stock by stock."

The NYSE invoked these so-called LRPs (short for "liquidity replenishment point") in a handful stocks on Thursday, including five Dow components and, most notoriously, Procter & Gamble ( PG). The LRP shifts trading in individual stocks from electronic clearance to a human auction, which slows the trading down so much that, in effect, the stock is halted.

After calling for a cessation of the war of words, Niederauer on his CNBC spot went on to insinuate that Nasdaq, with its robotic inability to deal with volatile situations, was to blame.

"You take the plane off autopilot sometimes, and you fly the plane," Niederauer said, noting that trading moved to human auction in the LRP stocks for periods of 30, 60 or 90 seconds Thursday afternoon.

"And guess what?" he said. "When they reopened here, they opened at basically where they had traded 30, 60 or 90 seconds ago."

Don't call it a blame game, however. That would be impolitic, undiplomatic, rude -- at least in the public realm and among the publicists looking to downplay the stock exchange rivalry as well as Thursday's market chaos.

"It's certainly something that bears taking a look at," said NYSE spokesman Ray Pellecchia of the discrepancy between the current circuit-breaker policies of the two exchanges. "But that's not the same as blaming them."

-- Written by Scott Eden in New York

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Scott Eden has covered business -- both large and small -- for more than a decade. Prior to joining TheStreet.com, he worked as a features reporter for Dealmaker and Trader Monthly magazines. Before that, he wrote for the Chicago Reader, that city's weekly paper. Early in his career, he was a staff reporter at the Dow Jones News Service. His reporting has appeared in The Wall Street Journal, Men's Journal, the St. Petersburg (Fla.) Times, and the Believer magazine, among other publications. He's also the author of Touchdown Jesus (Simon & Schuster, 2005), a nonfiction book about Notre Dame football fans and the business and politics of big-time college sports. He has degrees from Notre Dame and Washington University in St. Louis.

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