Is exchange competition increasing operational risk?

A total shutdown across the NYSE Euronext's European markets toward the end of trading on Wednesday 13 October marked the second incident in three days where trading did or did not stop as intended on exchanges managed by the global exchanges operator.
By None

A total shutdown across the NYSE Euronext's European markets toward the end of trading on Wednesday 13 October marked the second incident in three days where trading did or did not stop as intended on exchanges managed by the global exchanges operator. Following a similar glitch on Turquoise, the multilateral trading facility (MTF) operated by the London Stock Exchange, when it migrated to a new technology platform, the outage raises questions about the impact of exchange competition on reliability.

On Monday 11 October, trading in 60 US equities on the New York Stock Exchange (NYSE) overran into the close period.

A spokesman for the firm said that due to “an issue we experienced right at the close” for those US securities – which included some large blue-chip stocks – trading ended a few minutes before 17.00 eastern time. Normally, NYSE closes trading at 16.00. The firm has declined to provide more detail on the cause other than to attribute it to an internal IT issue that it has since been resolved, allowing trading to continue as usual the following day.

This was followed on 13 October by a major outage at NYSE Euronext's European markets. The matching engines for equities, bonds and exchange-traded funds were shut down at 16.42 central European time (CET) as a result of human error, according to a statement released by Lisa Dallmer, chief operating officer for European Cash Markets Execution Services at NYSE Euronext. Trading resumed progressively between 17.08 and 17.23 CET. While the matching engines were shut down, new orders were rejected and the order book remained unchanged. The warrants and certificates market was halted over this period. Following the resumption of trading the market pursued the normal close of day process and its closing auction began at 17.35 CET as usual, although market data was interrupted until 18.01 CET.

The outage was described as ”chaotic' by one market participant, with some traders expressing concern that trading recommenced via continuous trading, rather than beginning with an auction as is normal market practice, and that NYSE Euronext's market data broadcast was still disrupted for the period of the close of day auction.

Maintaining a fair and orderly market extends to situations in which trading is disrupted and restarted as UK regulator the Financial Services Authority noted in its publication on market conduct in August 2010. As Turquoise experienced its outage on 5 October before the trading day had started it did not face the same challenge of restarting the market.

Another source suggested that the competitive drive amongst exchanges to develop new products was now increasing operational risk. “We've come to a level of complexity and richness of functionality that goes beyond the core function of the exchange, which in my opinion is to guarantee a very reliable place to trade,” said Stephane Loiseau, deputy global head of execution services at Société Générale. “What is also concerning is that a lot of the technology that was put in place over the last couple of years to [prevent outages] did not [work].”

Loiseau acknowledged, however, that NYSE Euronext had communicated to the market about the incident more effectively than exchanges had in the recent past. “A memo come out the same day, at about 23.00. You never saw that a couple of years ago. You would ask for a post mortem and it would take a few days before the information would filter out by unofficial means, followed by the official communication,” he said.

A secondary effect of the incident was to highlight the continued dependence on primary exchanges in the market. MTF Chi-X Europe uses the primary exchange as the reference price for trades that are pegged to the mid-point and so once NYSE Euronext's market data failed Chi-X had to suspend all pegged orders which accounted for all orders on its dark book and an unspecified amount on the lit book. A sell-side contact also reported that client appetite for moving to alternative trading platforms when the primary venue failed proved limited.

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