Nasdaq, Bitcoin, and the failure of financial regulation

The proliferation of trading platforms is making it increasingly difficult for regulators to keep up with the pace of financial innovation.

high-speed-trading-620xaFORTUNE — A technical malfunction on Thursday that halted trading on the Nasdaq is the latest example of how financial innovation has outpaced regulation (and maybe always will).

U.S. Securities and Exchange Commission Chairman Mary Jo White has pledged to push for the adoption of proposed automated-trading rules after system errors caused a three-hour halt on the Nasdaq (NDAQ). Trading has resumed, but the technological glitch underscores the complexities of our financial system and how regulators struggle to keep up. Nasdaq officials internally pointed to a connectivity issue with the New York Stock Exchange’s Arca trading platform, according to several reports, but Nasdaq CEO Robert Greifeld declined to comment specifically when asked Friday morning on CNBC. “We knew professional traders had access to individual data feeds, but the traditional long investor, retail investor now didn’t have the same information, because of that, we halted the market,” he said.

Today, trading takes place on dozens of trading venues: 13 stock exchanges, about 40 private trading platforms and countless other trading platforms. And the financial landscape gets more complicated if we look at the nascent industry of virtual currencies, such as Bitcoin, which have been backed by high-profile investors including venture capitalist Marc Andreessen and entrepreneurs Cameron and Tyler Winklevoss. Firms have sprouted offering new trading platforms for virtual currencies.

MORE: Andreessen Horowitz is bullish on Bitcoin

Currently, most Bitcoins are traded on a Tokyo-based exchange called Mt. Gox. There are a number of other exchanges where virtual currencies can be traded; they’re also privately swapped among users.

Though niche, regulators have been keeping a watch of virtual currencies; officials worry that because they’re not backed by a central bank like traditional currencies are, they can be used for illegal activities such as money laundering.

Last week, the Wall Street Journal reported the New York Department of Financial Services issued subpoenas to roughly two dozen companies associated with Bitcoin as part of a wider look at the business of virtual currencies. This follows regulations launched by the U.S. Treasury Department in March, requiring companies that issue or exchange virtual currencies to follow new bookkeeping requirements, similar to traditional money order facilities such as Western Union.

Only time will tell how mainstream virtual currencies will get. For now, it’s the latest financial invention regulators are trying to figure out. Who knows what’s next — or what kind of havoc it will wreak on the markets.

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