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Nasdaq OMX Faces Reputational Risk But Trading Continues.

 

Exchanges and traders said they will continue normal business with Nasdaq OMX Group Inc. (NDAQ) at Monday's market open despite revelations that computer systems at the trans-Atlantic exchange operator had been hacked.

Though systems linked to stock- and option trading were not involved in the security breach, the exchange operator faces damage to its reputation and efforts to diversify by offering more high-margin technology services.

NYSE Euronext (NYX) and Direct Edge, two of the largest U.S. exchange operators, said they would continue their links with Nasdaq. Customer orders are routed electronically between platforms to find the best price.

Some of the country's largest traders said Saturday that they would continue to send orders to Nasdaq, which runs the second-largest U.S. equities exchange and one of the biggest options platforms. It also runs exchanges in Europe.

Nasdaq OMX in a statement Saturday acknowledged that its computer network had been infiltrated by unidentified parties, who installed malicious programs on a Web-accessible system called Director's Desk, one of its technology offerings that facilitates communication and sharing of files among corporate officers.

The company said it was informing clients, with no indication that any files were accessed. The trade-matching engines used to execute stock trades were unaffected, according to the company.

The breach, first reported by The Wall Street Journal, is being investigated by the Secret Service and the Federal Bureau of Investigation, according to people familiar with the matter.

The exchange sector is highly competitive but tightly linked by the networks that facilitate round-the-clock electronic trading.

"We are monitoring the situation at Nasdaq, but we are not planning to make any operational or trade routing changes for Monday," said Bryan Harkins, chief operating officer for Direct Edge, which handles about 10% of U.S. share trading.

NYSE Euronext officials said it continually reviews security procedures but planned normal operations Monday across its equities and options exchanges.

Officials at BATS Exchange and the International Securities Exchange, which operate large stock and options trading platforms, declined comment. Traders were guardedly optimistic that U.S. trading would be unaffected on Monday.

"While it is concerning that hackers have targeted Nasdaq's computer network, I feel comfortable in the fact that [their] response clearly stated that their trading platforms were not compromised," said Tony Sanfilippo, chief executive of Hudson Securities.

"We do not expect to modify our order-routing destinations at Hudson Securities based on the information available at this time and would not be hesitant to continue to use the Nasdaq trading platform," he said.

The hacking episode could prove a bigger challenge for the processing and technology services that account for two-thirds of revenue at Nasdaq OMX, whose shares have recently been trading at their highest level in more than two years.

The company has built out a suite of technology and surveillance offerings to serve its own markets and to sell systems and services to brokerage customers, issuers and other exchanges.

Companies that list shares on the Nasdaq Stock Market may shy away from services like Director's Desk, according to Patrick Healy, chief executive of Issuer Advisory Group, which consults with companies contemplating a share listing.

"This is not something that issuers are just going to ignore," said Healy of the hacking. "If you're a user of that product--and there are many--you're going to ask, 'Can I trust that system for confidentiality?'"

Exchanges have confronted cyber-security issues in the past. In July 2009 the public websites of NYSE Euronext and Nasdaq OMX were said to have been targeted alongside those of the White House and U.S. Treasury in a wide-ranging attack.

Bob Greifeld, chief executive of Nasdaq OMX, in a Jan. 27 interview with Fox Business News called cyber-terrorism a "prevailing concern" for Nasdaq OMX that is drawing an increasing amount of time and effort.

"The concept of a firewall now is quaint, in that you need a lot more than firewalls to insure yourself against very sophisticated attacks that can come in through the cyber world," said Greifeld at the time.

He said networks now must be segmented to ensure that any attacks are isolated and ensure that core systems are "insulated" while still providing access to customers.