System Outages Due to Software and Hardware Malfunctions

The system outages experienced by NASD in July and August were due to malfunctioning software and hardware. For example, individual investors were not significantly affected and did not report complaints regarding the outages. Conversely, market makers were impacted because they did not have the benefit of NASD’s automated quotation and trading system to conduct business. While NASD Prepares for Contingencies, Management and System Control Weaknesses Exist

NASD has taken significant steps to prepare its systems for contingencies and disasters. It operates a backup computer facility to be used if there are problems or outages at the primary computer site. For example, the Commission established an Office of Automation and International Markets and issued an automation review policy that encourages the securities markets to perform independent reviews of their automated systems and operations in such areas as contingency and disaster planning. While SEC has made progress in strengthening oversight of market automation, gaps still exist in its oversight program. Recommendations

We recommend that the Chairman, SEC, ensure that NASD expands testing processes for its market systems to better detect performs a thorough assessment of its existing systems environment to avoids implementing software changes on potentially volatile trading days; corrects weaknesses in its contingency and disaster recovery plan and backup data processing facility; and regularly schedules and conducts audits of its market systems. We are sending copies of this report to interested congressional committees, the Chairman of the Securities and Exchange Commission, the President and Chief Executive Officer of the National Association of Securities Dealers, and to other interested parties.
Why GAO Did This Study

Pursuant to a congressional request, GAO reviewed recent computer outages experienced by the National Association of Securities Dealers' (NASD) automated quotation and trading systems (NASDAQ), focusing on: (1) the nature and causes of the outages; (2) the outages' impact on market participants; (3) NASD planned responses to contingencies and disasters; (4) NASD oversight of its automated systems and facilities; and (5) how well the Securities and Exchange Commission (SEC) is ensuring that the securities markets are prepared for contingencies and disasters.

What GAO Found

GAO found that: (1) unrelated software and hardware malfunctions caused the NASDAQ outages; (2) although NASD has seriously sought to make its systems more reliable, there are areas where it needs to make further improvements, such as testing new software; (3) although the outages did not significantly affect individual investors, they severely hampered broker-dealers's ability to perform best and efficient securities trades; (4) control weaknesses at the NASD backup computer facility and in NASD contingency and disaster plans could make it difficult for NASD to recover quickly from disasters; (5) NASD failure to include market systems reviews in its internal audits limits its systems oversight; and (6) although SEC has strengthened oversight of market automation in some areas, weaknesses still exist in its oversight program.