NYSE Reviewing Upgrade as Possible Cause of Options OutageSam Mamudi and Nikolaj Gammeltoft
NYSE Euronext is looking into whether a software upgrade at a subsidiary disrupted a price feed that briefly halted U.S. options exchanges today.
Securities Industry Automation Corp., the NYSE unit that oversees the quote dissemination service linking U.S. options markets, is focusing on a programming update that may have led to today’s halt, said Rich Adamonis, an NYSE Euronext spokesman.
The interruption came three weeks after Nasdaq OMX Group Inc.’s system for distributing U.S. stock prices failed, prompting a three-hour halt for thousands of companies. In the aftermath, securities regulators told exchanges last week to collaborate on preventing more shutdowns.
“The miscues that have occurred today are eerily similar to those with Nasdaq,” said Yousef Abbasi, market strategist at JonesTrading Institutional Services LLC, a Westlake, California-based broker. “You have issues with a price reporting or quote disseminating system.”
All 12 U.S. options exchanges temporarily shut today, with firms including CBOE Holdings Inc. and Nasdaq OMX blaming an issue with the Options Price Reporting Authority data feed that SIAC administers.
While trading continued without disruption on American equity markets, stock prices slipped around the time of the mishap. About 614 million shares had traded on all exchanges between 1:30 p.m. and 2:30 p.m. New York time, compared with 499 million in the preceding hour, according to data compiled by Bloomberg. The Standard & Poor’s 500 Index fell from 1,702 to below 1,698 between 1:30 and 1:43 p.m.
In a meeting with the heads of U.S. securities markets last week, Mary Jo White, the chairman of the Securities and Exchange Commission, urged the executives to shore up price feeds that serve investors and traders.
Participants included representatives from the U.S. stock and options exchanges, the Financial Industry Regulatory Authority, Depository Trust & Clearing Corp. and Options Clearing Corp. They were told to “provide comprehensive action plans that address the standards necessary to establish highly resilient and robust systems for the securities information processors,” the SEC said in a statement. That includes “testing standards and disclosure protocols,” it said.
The gathering occurred three weeks after Nasdaq’s computers were flooded with data from NYSE Arca, a competing exchange, revealing a bug in Nasdaq’s securities information processor that disabled systems that should have prevented the malfunction from snowballing.
Today’s error “was only a short outage,” Daniel Brady, president of San Francisco-based trading firm Entropy Capital LLC, said in a phone interview. “Not that significant,” he said. “I imagine this is just further fodder for the SEC and their review.”
“As is our practice, we have been monitoring developments and discussing them with market participants as appropriate,” said John Nester, an SEC spokesman.
The closure is another setback for American exchanges, which have faced criticism that the complexity of their electronic infrastructure makes them vulnerable to breakdowns. In addition to the Nasdaq halt on Aug. 22, options markets were roiled in August when Goldman Sachs Group Inc. bombarded exchanges with erroneous orders due to a computer malfunction.
In April, the Chicago Board Options Exchange was down for 3 1/2 hours because of a software error caused by preliminary work in preparation for a computer system reconfiguration. The outage prevented investors from trading options based on the VIX gauge of volatility and the Standard & Poor’s 500 Index, the most active in the U.S. which CBOE has exclusivity on.
According to OPRA’s website, each trade that is executed on an options exchange is reported to OPRA as a message, with quote message traffic representing the vast majority generated.
“Quotes are generated automatically for individual options series based on changes in the underlying stock price or index value,” it said. “In other words, every time a price changes for a particular equity security, the quotes for all of the options on that security or an index in which that security is represented are automatically updated on each exchange that trades those options.”
Regulators have tightened rules at exchanges to avoid market disruptions such as the May 2010 errors that briefly sent the Dow Jones Industrial Average down almost 1,000 points because of a faulty algorithm in what’s become known as the flash crash.