Market outages are one area where UK and EU could collaborate amid divergence, says Cboe

According to Cboe Europe’s head of equities, ESMA and the UK are aligned in their approach to how venues should communicate outages to ensure market resiliency.

Cboe Europe’s head of equities, Natan Tiefenbrun, has said that guidelines around market outages could be one area where the UK and the EU collaborate amid swathes of ongoing Brexit-induced divergence.

Both the UK and the EU have stressed the importance of communication in their approaches to how trading venues should manage outages and trading disruptions.

“This is one of the areas where it could be beneficial for the UK and the EU to act collaboratively and take steps in tandem,” said Tiefenbrun. “Any good ideas that come up in either jurisdiction should naturally over time be taken into consideration on the other side of the UK/EU border, because this is not an area where they should compete. This is something that is truly beneficial to Europe as a whole if both UK and EU markets become more resilient.”

There have been several market outages across trading venues in the last year, caused by varying systematic and technological failures. However, as highlighted by ESMA, consolidation across trading venues means the impact of such occurrences are felt much more significantly throughout the wider market.

In particular, Euronext, which suffered a three-hour outage in cash equities across its five European venues due a technical issue in October last year, and Deutsche Börse which suffered two separate outages in 2020 due to software glitches.

ESMA has highlighted in its recent consultation paper on algorithmic trading that venues should first and foremost focus their efforts on letting the industry know when a market is down and give a timeline of when trading can be expected to resume.

The regulator – when stressing this – reinforced that this communication “without undue delay” should include information on the status of all orders sent to the venue prior to the outage to give participants certainty on the status of said orders and the opportunity to use an alternative trading venue if necessary.

“Trading venues are invited to improve their communication towards market participants based on the feedback received during the consultation and summarised in this report,” said the European markets regulator in its paper. “ESMA will, in parallel, develop providing more formalised guidance to trading venues on what is expecting from them in terms of communication in case of market outages.”

In its recent Wholesale Markets Review, the UK took a similar stance, setting out plans to draft what it refers to as a playbook to create a framework which both venues and participants can refer to, to ensure best practice in periods of system failure.

The HM Treasury in its review explained that if implemented this playbook could set out guidelines on the “clear and timely information” that venues are expected to communicate to the market, immediately during and after an outage.

“What is becoming clear from ESMA’s paper and from all the responses to the Wholesale Markets Review is that the point of communication is to give participants certainty on their order and trade status so that they can understand the risk exposure and can therefore trade elsewhere with confidence,” said Tiefenbrun.

“Venues have to be cognizant not only of what’s happening in their own market, but of how their outages or disruptions are impacting broader market continuity. The responsibility around communication should be to make sure you are helping the rest of the market remain orderly in your absence. The key is this realisation that you have a broader responsibility.”

ESMA in its algorithmic trading report suggested a two-hour period in which venues should aim to be back up and running within. However, the regulator also added that it understood a timeframe has not been helpful in some cases and that it may consider whether this remains an appropriate aspect of official guidelines.

According to Tiefenbrun, in the past, venues have prioritised getting back up and running as quickly as possible following an outage, as opposed to communicating the problem effectively.

“Unless you’ve got a very clear framework, what staff tend to prioritise is finding out what’s wrong and fixing it. Imposing an artificial deadline can make venues rush and may be counterproductive.” he said. “Sometimes you might need to be a little bit slower on fixing your venue, because for the health of the broader market, the first thing you need to do is tell everybody any message you sent after this time was not received or any trades after this time will be cancelled.”

While the UK and EU align on the level of communication needed following an outage, whether an alternative trading venue can take the place of a primary one to ensure continuity at the closing auction remains an area of divergence.

The UK’s Wholesale Markets Review suggests that as part of its upcoming conclusions following the review, authorities could explore with venues and participants the potential for an alternative mechanism to act as a closing auction in the event of an outage. This could involve alternative venues stepping in to provide key benchmarks as a backup during primary outages.

This is a solution that Cboe’s recent report on equity market resilience highlights, suggesting that a potential solution to ensure the price formation necessary to establish the essential closing price could be have regulator designated alternative venues to operate auctions.

ESMA does not take the same stance on this aspect of the Wholesale Markets Review’s suggested regulatory changes, instead highlighting that a lack of standardisation of instruments traded across alternative venues could leave some market participants at a disadvantage while some participants may not have access to such venues in the first place.

“It feels like there is strong momentum both in the EU and in the UK to try and address the challenges and the key market stresses. I think some of the more complicated questions such as should there be alternative closing auctions, can be addressed further down the road,” concluded Tiefenbrun.