Exchanges

Credit Suisse calls for EBBO after NYSE Euronext outage

Pricing discrepancies between NYSE Euronext and Europe's multilateral trading facilities (MTFs) after the exchange experienced a 40-minute outage on 13 October have reinforced the need for a single European best bid offer (EBBO) source, according to Credit Suisse.

According to exchange operator NYSE Euronext, the crash was caused by an operator error at 16.42 central European time (CET). It took out the matching engines of the equity, bond and exchange-traded fund markets. These were restarted between 17.08 and 17.22 CET in continuous trading mode, before the closing day auction took place at 17.35 CET as normal. Market data supply was not restored until 18.01 CET.

Although trading on venues whose price was pegged to the midpoint on offer at the primary venue was halted, trading on many lit MTFs continued. “MTFs had almost entirely recovered their pre-outage liquidity before the resumption of trading on the primary,” asserted a research note from Credit Suisse's Advanced Execution Services division.

This is markedly different to an outage at the London Stock Exchange on 26 November 2009 when MTFs lost liquidity as trading on the primary halted. Although sell-side sources suggested that some clients were still unwilling to migrate their trading to an alternative venue during the recent NYSE Euronext glitch, the volumes on MTFs suggest that their liquidity levels are now far more stable than a year ago.

The outage may also reignite the ongoing debate about the role of primary markets and MTFs in price information. The prices at which trades executed on NYSE Euronext when its markets restarted were “substantially away” from the “correct prices” published by actively trading MTFs, said Credit Suisse. For example, the stock price of STMicroelectronics and Total both rose on MTFs during the outage and declined gradually from these highs as trading resumed on the primary market. NYSE Euronext restarted trading at prices closer to pre-outage values than those prevalent on MTFs and convergence took longer than ten minutes in certain cases.

Although vendors have previously said that their pre-trade price discovery systems are “good enough” Credit Suisse concluded its report saying “Until an EBBO is formally established individual exchange outages will continue to wreak havoc on overall liquidity and price discovery.”