S&P warns exchange glitches could trigger downgrade

A spate of technical snafus at global exchanges reveal their growing vulnerability to operational hazards and could trigger a downgrade of their credit ratings, according to Standard & Poor’s.

The rating agency said that the recent glitches suggested that equity exchanges in particular had become more prone to breakdowns and could face stricter regulatory standards and oversight as well as the risk of reputational damage.

“We account for some operational risk in our ratings already, but as technical problems occur more frequently, operational risk is becoming a more important in our analysis and could result in downward pressure on ratings over the next few years,” analysts at S&P said.

The report comes after a series of high-profile outages capped by last month’s unprecedented three-hour trading halt in some of the world’s largest securities, including Apple, Google and Microsoft, after a problem with a data feed run by Nasdaq crippled US stock trading.

Following that incident, Mary Jo White, chairman of the US Securities and Exchange Commission, called on exchange heads to identify specific steps to prevent technical outages that have damaged investor confidence in the world’s largest capital market.

The report highlighted other events that have raised concerns about the fragility of market systems such as the problems at Nasdaq that disrupted Facebook’s market debut. BATS, the third-largest US stock market operator, bungled and failed to successfully launch its own initial public offering on its own exchange last year.

The rating agency said reforms implemented to increase competition in US and European equity markets several years ago have contributed to the unintended increase the number of system failures.

Those changes had seen market share shift from the once dominant operators, NYSE Euronext and Nasdaq, and trading was now fragmented across 16-registered exchanges and more than 50 alternative trading venues, the report said.

Advances in trading technology had also increased the complexity of the market, with a bulk of trades being transacted at millisecond speeds. “In our view, faster trade speed and greater interconnectivity are amplifying the impact of operational glitches when they occur,” the report said.

S&P said derivatives and futures exchanges, such as IntercontinentalExchange and CME Group, had “vertical” business models – where trading and services are conducted under one roof – which made them less vulnerable to market-wide problems.

S&P had not lowered any ratings after the recent issues, but warned that it may downgrade those exchanges where risks exceeded the industry average. “Nasdaq’s operational glitches, for example, could damage its franchise,” S&P said.

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