Buy-side reluctant to rely on MTFs despite flurry of outages

Monday's technical glitch at NYSE Euronext, the sixth outage on European trading venues in barely a month, has put exchange reliability back under the microscope. But while brokers offer institutional clients the ability to continue trading when a market is down, buy-side traders remain hesitant.
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Monday's technical glitch at NYSE Euronext, the sixth outage on European trading venues in barely a month, has put exchange reliability back under the microscope. But while brokers offer institutional clients the ability to continue trading when a market is down, buy-side traders remain hesitant.

On 27 June, an “inconsistent system messaging state” on NYSE Euronext, which left members unable to trade French blue-chip stocks between 10.57 and 11.45 BST, was the exchange group's third separate technical hitch in little over a week in Europe.

On the previous Tuesday, 21 June, the exchange said that “latencies on the cash market” forced it to halt trading in a number of instruments, including Dutch and Belgian blue-chips, from 08.03 to 10.00 BST. And on 20 June, a software problem delayed the opening auction on all NYSE Euronext's cash markets for an hour.

Multilateral trading facility (MTF) Chi-X Europe suffered three separate outages on 23 May, 13 June and 15 June, all for between 15 and 30 minutes.

According to analysis from data provider Intelligent Financial Systems (IFS), the 30-minute outage that hit Chi-X Europe on 13 June had a limited impact on the spreads and liquidity on most other venues.

There was however a slight drop in available liquidity on the London Stock Exchange during the Chi-X outage, perhaps reflecting a reduction in arbitrage trading strategies between the two.

IFS's analysis of French trading activity on 20 June found that liquidity all but dried up on MTFs in the absence of the primary exchange's market auction, with spreads reaching 200 basis points, before recovering to the normal 10 bps level when trading resumed. The other two NYSE Euronext outages occurred after the opening auction and saw some trading migrate to MTFs.

The firm's analysis showed that during the 21 June outage, MTFs offered “reasonable spreads” and traded around 15-20% normal volumes. Between 09.00 and 09.30 BST, the amount of resting liquidity at 50 basis points either side of the mid-point rose to 30-40% of normal levels.

During Monday 27 June's outage for French stocks, trading on MTFs traded roughly 30% of their normal volumes.

Furthermore, the IFS report showed that on both the 21 and 27 June, liquidity on MTFs dried up as soon as NYSE Euronext announced its plan to resume trading, then picked up again once the primary market was up and running.

The outages did not appear to have any material impact on the market shares of MTFs and exchanges.

According to figures from BATS Europe, NYSE Euronext had 63.76% of CAC40 liquidity on 27 June, compared to 21.59% for Chi-X, 6.27% for Turquoise and 4.73% for BATS Europe.

On 20 June, when all its European cash markets were affected, NYSE Euronext had 61.93% of CAC 40 trading, 62.31% of AEX trading and 62.62% of BEL 20 stocks. On the same day Chi-X Europe, had 21.89%, 24.95% and 22.46% in each market respectively.

During May, NYSE Euronext accounted for 62.1% of CAC 40 liquidity, 50.4% of Belgian blue-chip liquidity and 58.28% of AEX trading in May. Chi-X Europe was between 20-23% of market share in each country, according to Thomson Reuters Equity Market Share Reporter.

The growing sophistication of routing technology and the plethora of MTFs and crossing networks means trading need not grind to a halt if a European primary exchange is unavailable, but most traders – particularly long-only investors – seem unconvinced by the liquidity on alternative venues and prefer to sit on the sidelines.

“The real issue is about appetite,” said Richard Parsons, head of sales and trading at agency broker Instinet Europe. “We were sending algo and smart order router flow to the MTFs during the outage but much of the MTF liquidity is typically arbitrage flow so when the primary exchange is not functioning then this liquidity disappears. The more traditional firms will typically put orders on hold during an outage as they are still concerned about correct price formation.”

Immature markets

While brokers have the capabilities to locate liquidity during most outage situations, the reluctance from buy-side traders to continue trading is in part due to the lack of “mature fragmentation” in Europe, said Andrew Bowley, head of electronic trading product management, Nomura.

“We do not yet have the final landscape of liquidity points in Europe because of ongoing stock exchange mergers and the number of recently launched MTFs that are still growing,” Bowley told

In addition to pending mergers between Deutsche Börse and NYSE Euronext and the London Stock Exchange and Canada's TMX Group, BATS Global Markets, which operates MTF BATS Europe, is attempting to finalise a deal to buy Chi-X Europe. Furthermore, Quote MTF, the newest European alternative trading venue, is slowly beginning to gain traction and retail-focused market Equiduct has started to establish a presence in CAC 40 stocks, accounting for 1.46% of total French blue chip trading in May, according to data from Thomson Reuters.

As such, Bowley believes this instability of market structure prevents the industry from devising a common industry approach to handling outages.

“Clients have a variety of views on how they should act during an outage,” he said. “Many of the issues relate to things like benchmarks. For example, if a client wants to achieve a specific proportion of trading volume throughout the day, how would this benchmark change in the absence of a primary market? It can get confusing and requires individual conversations with clients.”

The increasing number of exchange outages is also driving the adoption of new tools to help market participants identify and respond to technology problems in a timely manner to ensure minimum disruption.

“The sooner the people that operate the technology infrastructure can identify problems the nature of problems across all possible access points, the better equipped they will be,” said Kevin Covington, CEO of ITRS, a systems monitoring company. “The latest string of exchanges outages demonstrates how critical this is becoming to organisations.”

Outages have steadily increased in frequency as trading venues continue to entice high-speed trading firms with new and sophisticated trading platforms. In February, the London Stock Exchange (LSE) was unavailable for four hours following a data dissemination problem that occurred just two weeks after the migration of the UK cash market to its new Millennium Exchange platform. Again, buy-side traders were reluctant to reallocate their flow to alternative venues. This came just months after Turquoise, the LSE-owned MTF, delayed opening by an hour and 15 minutes on 5 October, the first day of its operation on Millennium Exchange. Earlier that month, NYSE Euronext also reported separate issues on its US and European markets.