CBOE Reopens After Malfunction Shuts Options Exchange

The Chicago Board Options Exchange opened for trading three-and-a-half hours late today after a software malfunction shut the derivatives market while top executives were at an industry event in Las Vegas.

CBOE Holdings Inc.’s exchange, which accounts for about 25 percent of options trading, said the technical issues were not the result of a computer hacker. Ed Provost, chief business development officer, said at the conference that a software malfunction caused the outage. Trading in Standard & Poor’s 500 Index products started at 12:50 p.m. New York time and the rest of the exchange opened at 1 p.m. rather than the usual 9:30 a.m., CBOE said.

“We had some technology problems this morning,” Provost said in a panel debate at the conference. “It’s a software glitch and we’ll identify the problem.”

While most equity-derivatives contracts are traded on multiple exchanges, which boosts competition for the quoted prices, or bids and offers, CBOE is the exclusive venue for options based on the S&P 500 Index and the so-called VIX gauge of equity volatility.

“There is no alternative to VIX other than over-the-counter trading,” Mark Sebastian, director of education at Option Pit Mentoring in Chicago, said in an interview. “This makes hedging very difficult.”

Vegas Huddle

Bill Brodsky, chairman and chief executive officer of CBOE Holdings, and Provost are at the Green Valley Ranch Resort & Spa in Las Vegas, Nevada, where they are attending the annual Options Industry Conference. While their exchange was shut, the two read from their smartphones in a huddle of CBOE executives outside the resort where traders and exchange officials from throughout the options industry had gathered. CBOE Chief Branding Officer Carol Kennedy blocked a Bloomberg News reporter from approaching the two for comment, referring the person to a press release.

About 450 people were in attendance at the conference with representatives from firms such as Goldman Sachs Group Inc., BlackRock Inc. and Group One Trading, the primary market maker for VIX options.

Shares of CBOE finished the session up 16 cents, or 0.4 percent, at $36.61 as of 4 p.m. in New York after losing 0.4 percent earlier. The stock is up 25 percent this year.

‘Sarcastic Cheer’

The open of the exchange in Chicago was greeted with a “sarcastic cheer” from floor traders, according to Jim Phillips, who works at DSM Trading and trades futures and options in the S&P 500 pit of the CBOE.

“They razzed the guy giving the updates,” said Phillips, 28, in an interview outside the exchange. “I just couldn’t believe it was happening. Just unbelievable that it could be compromised so quickly.”

The Securities and Exchange Commission was monitoring the situation “as is our practice,” spokesman John Nester said. The delay highlighted the fragility of U.S. equity exchanges in a week when a false report of explosions at the White House briefly wiped out $136 billion from the S&P 500 in about two minutes.

CBOE Futures Exchange, C2 Options Exchange and CBOE Stock Exchange were operational, the company said. The company runs two options markets, a stock exchange and a futures bourse.

CBOE published its first notice about technical problems experienced by users trying to download products listed on its main trading venue and CBOE Futures Exchange at 8:18 a.m. New York time.

Delay Plans

The exchange initially planned to start trading at 10:15 a.m., 45 minutes after it normally begins, and delayed that by five minutes. At 10:21 a.m. it canceled that plan.

CBOE said in a later statement that the malfunction “affected validation of certain orders and the communication of cancel/fill reports” and was corrected.

The delay prompted investors to seek hedging in other products, such as options on the SPDR S&P 500 ETF Trust, according to Jeremy Wien, head of VIX trading at JPMorgan Chase & Co. in New York.

About 1.9 million options contracts on the ETF changed hands in the half-day’s worth of trading before CBOE reopened at 1 p.m. New York time. That compared with a full-day average of 2.4 million this year, data compiled by Bloomberg show.

“There are other exchanges that have been open on normal hours, so I think it’s basically just been a re-routing of hedging to those exchanges,” Wien said in an interview.

‘Zero Business’

CBOE Holdings and S&P Dow Jones Indices extended the options exchange’s exclusive license to trade contracts based on the S&P 500, Dow Jones Industrial Average and other broad gauges until 2032, the companies said in March. Exclusive rights to the S&P 500 and S&P 100 previously expired in 2018 and those for the Dow average were scheduled to end in 2017, according to CBOE.

Index contracts including the S&P 500, the most-active in the U.S., generated more transaction fees than any other product at CBOE in the fourth quarter.

“We are doing zero business,” Greg Richards, who trades VIX and S&P 500 options as an institutional broker at Chicago-based PTR Inc. on the CBOE floor, said in an interview during the shutdown. “It is not good for the CBOE in a competitive atmosphere.”

Index contracts accounted for 64 percent of CBOE’s total options transaction fees last year, compared with 55 percent in 2011, according to regulatory filings. Transaction fees for options on equities slid to $13.5 million in the fourth quarter of last year, 25 percent less than in the same period in 2011.

CBOE had a computer malfunction that halted trading for about two and a half hours in February 2000. The exchange’s trading systems malfunctioned in November 2007 and disrupted trading for about an hour. A power failure also shut the exchange for 35 minutes in August 1999.

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