Quick View

August 7, 2012 1:45 pm

Quick View: Glitches stir disclosure debate

Three software glitches affecting trading on prominent global exchanges in the last week provoked three different responses.

Firstly the much-publicised Knight incident, which affected 140 stocks, although trades in just six were cancelled. Then Bolsas y Mercados Españoles, the Spanish bourse, was down for 4.5 hours on Monday, shortly followed by the Tokyo Stock Exchange’s derivatives market suffering a 90 minute outage on Tuesday.

All such incidents are embarrassing. For the BME – which told the Financial Times only in June it couldn’t remember its last outage – it was a rare event. For the TSE, it came just six months after a breakdown in its data distribution system that knocked out an entire morning’s trading of stocks at the height of the third-quarter reporting season. What’s been most interesting has been the reaction from each party.

Admirably, Tom Joyce, chief executive of Knight, made no attempt to blame anyone else, nor make the customers take the hit. “This has nothing to do with the stock exchange,” he told Bloomberg TV. “It was a software bug, except it happened to be a very large software bug.” Yet we still don’t know exactly what the problem was and what happened.

The TSE left it at “systems problems” although it promised an update. Nevertheless, it has a history of cutting the monthly pay of its chief executive by double-digits when its trading platforms fail for an extended period. In Japan, cultural pressures around public shame bring their own punishment.

Contrast that with BME, where traders complained that they were kept in the dark all day. Even now, there has still been no explanation of what went wrong. The crumbs that have emerged are that BME went into auction mode for about 3 hours, which effectively kept traders orders stuck in the BME auction. It meant that they couldn’t be cancelled and moved over to rival venues such as BATS Chi-X Europe. “Very frustrating” was a typical comment.

Traders say volumes have been halved since the introduction of a shorting ban on Spanish stocks, reducing its importance to international investors.

But the BME’s response was far from sufficient, especially for an exchange with designs on attracting investors from around the world. Investors are generally forgiving of the odd outage and accept that computer systems sometimes fail. Complete silence does nothing to build up trust.

Perhaps now is the time for a serious examination about market participants’ responsibilities to the market for their technology, especially among exchanges. When it breaks, what should and should not be disclosed? Should everyone be treated the same?

For example it’s little known, but stock exchanges designated as self-regulatory organisations in the US have immunity from financial liability for technology malfunctions.

Dan Mathisson, head of US equity trading at Credit Suisse, drew attention to that as part of his testimony to the Congressional hearing into the future of market structure in June.

Talking about the Nasdaq glitches that hit the Facebook IPO, he said: “Absolute immunity may have made sense when exchanges were not-for-profit, member-owned regulatory organisations. But today, the NYSE and all exchanges are for-profit enterprises that are not particularly different from broker-dealers,” adding that regulatory responsibilities are outsourced to Finra.

“We believe that providers of trading technology will naturally exercise greater caution if they have material liability when their technology fails. Restoring exchanges’ moral hazard would be an important step towards creating a more reliable marketplace,” he said.

Whether it needs to go as far as being repealed is another matter. But for too long many exchange executives have hidden behind the meaningless statement that: “It’s technology. It breaks.”

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