After their first collective meeting with US Securities and Exchange Commission (SEC) chair Mary Jo White on 15 September, leaders from the equities and options exchanges, their respective clearing organisations and the Financial Industry Regulatory Authority (Finra) are examining how to avoid and improve their handling of trading halts and resumptions.
The meeting was not a postmortem of the 22 August UTP, or Tape-C, securities information processor (SIP) outage that led to an approximately three-hour trade halt for Nasdaq OMX-listed stocks, according to Gary Katz, CEO of the International Securities Exchange (ISE). “It was positive and very little time was spent looking backwards at any specific past event. Instead, the meeting focused on moving forward and addressing common issues.”
The attention to post-event coordination was probably the biggest topic that came out of the meeting as well as identifying the remaining single points of failure in the current market structure, according to Katz, who was pleased that not all the attention was on mitigating future technology failures.
“All market participants know that no set of regulations will stop events like these from happening,” he says. “Computers systems have their bugs and these events tend to occur when multiple issues crop up at once. ... We are better off focusing our efforts on when they occur rather than spending time trying to prevent all of these events from happening.”
For example, the ISE did not suffer a trading outage when the UTP SIP failed. The exchange, along with its market makers, employ redundant market data feeds from the equities exchange, which were unaffected by the SIP outage.
“The challenge the ISE had, and which I think the SEC would like the industry to address, was that there was not a clear understanding when the SIP formally halted trading,” explains Katz. “There wasn’t a clear time stamp of when trading stopped in the underlying stocks, which led to the various options exchanges referencing different time stamps when halting trading.”
The options exchanges faced a similar issue when it came time to reopen trading and deciding which trades in the affected options contracts they needed to break.
“Such behaviour creates confusion, stress and risk in the marketplace,” says Katz. “Clients wonder why one set of trades would be broken on the ISE while other trades would be broken on another options exchange.”
Any changes made to address these issues must be made viewing the equities and options markets as a single market, he adds. “One could even argue that the futures markets could be viewed as equally important to the other two because of how each is interconnected to the others.”
As part of their homework assigned by the SEC, the option exchange operators discussing which of their processes could be standard across all of their platforms.
Katz is quite clear that the harmonisation conversation concerns the specific subset of trade-break rules rather than a broader range of rules. “No one discussed, or even broached, the subject of harmonizing all the rules. After all, we do compete with each other.”
Kill the messenger?
One way to avoid future SIP outages and their resulting trading halts is to simply eliminate them, suggests Kevin McPartland, head of market structure research at industry analysis firm Greenwich Associates.
“It's an area of technology where there are so many innovative providers and solutions that I'm not sure if it is necessary to mandate and regulate the consolidated tape any more,” he explains. “The industry has solved that problem on its own.”
If one provider fails then clients would go to another provider in true capitalist fashion, he adds.
Retiring the consolidated tapes is a potential solution agrees Katz. But before decommissioning any SIP server racks, the industry and regulators need to understand how the entire range of market participants obtain their market data.
“It is too easy to say that everyone has direct exchange feeds and firms are no longer dependent on it,” Katz adds. “It requires a more rigorous review and talking not only to the market markers, who take their feeds directly, but to organisations like brokerage firms and media outlets about how they obtain their information today. Yet, it is a viable solution which should be considered.”
However, the SEC might not find such a radical change to the current market structure that appetising, adds McPartland. “The public might view it as removing regulation, which is not a politically viable thing to do now.”