CME Error Halted Trading of Major Futures Contracts

A technical error at CME Group Inc. prompted a four-hour trading halt at the world’s largest futures market, preventing buying and selling of contracts tied to major stock indexes, Treasuries, oil and gold.

CME Group was forced to suspend trading from 5 p.m. to 9 p.m. Chicago time yesterday on its Globex electronic market, according to statements on its website. Only Malaysian equity-index derivatives were available.

It was one of the longest exchange disruptions of 2014 and took place almost exactly a year after an Aug. 22, 2013, malfunction at Nasdaq OMX Group Inc. caused a three-hour halt for some of the biggest U.S. stocks, prompting U.S. securities regulators to demand exchanges improve their reliability. CME experienced a more than 90-minute trading halt on April 8 with some agricultural futures.

The shutdown was “not as disruptive as if it had been a problem during the U.S. and European trading hours,” Craig Pirrong, a professor at the University of Houston, said during an interview. “I’m sure that this will engender a look by CME of ‘Gee, how can we mitigate these problems going forward,’ but I’d have to think it won’t ever be possible to eliminate them.”

CME Group owns exclusive rights to Standard & Poor’s 500 Index futures, meaning contracts tied to one of the most-watched stock measures couldn’t trade during the disruption. The Chicago-based owner of the Chicago Mercantile Exchange and New York Mercantile Exchange also dominates trading of West Texas Intermediate crude oil futures and Treasury contracts.

Central Bankers

“CME Globex markets were halted due to a technical issue resulting from planned software reconfigurations made over the weekend as part of ongoing technology enhancement projects,” Laurie Bischel, a Chicago-based spokeswoman for CME Group, said in an e-mailed statement. “All CME Globex markets are open and operating normally this morning and have been since trading began” at 9 p.m. Chicago time yesterday, she added.

Following the incident, CME Group’s shares rose 1.1 percent to $75.65 today, posting a fourth straight daily gain.

Traders were barred from using some of their favorite derivatives to bet on remarks from the annual central banker conference in Jackson Hole, Wyoming. Federal Reserve Chair Janet Yellen said labor markets still have further to heal before their economies can weather higher interest rates.

Record Interest

CME Group had a record 103.4 million contracts outstanding as of Aug. 7, according to a statement. Traders use futures to speculate on the price of underlying assets or hedge their portfolios. For instance, an investor who holds individual U.S. stocks or exchange-traded funds might sell an S&P 500 contract to protect against losses from broad market moves.

“Clients hate it,” said Evan Lucas, a Melbourne-based strategist at IG Ltd., a provider of equity-index, commodities and currencies trading, about the CME Group outage. “They couldn’t increase or, more importantly, shut positions, but there is nothing you can do.”

CME Group has mostly avoided the breakdowns that plagued U.S. stock markets, though its S&P 500 futures contract was identified by regulators as helping precipitate the flash crash of May 2010. In the stock market, U.S. Securities and Exchange Commission Chair Mary Jo White last year demanded that market operators improve their infrastructure and procedures to prevent additional malfunctions -- a move she made in the aftermath of the Nasdaq error.

Spot Trading

Asset classes where there is also a spot market, such as precious metals, are less affected when futures are halted, said Jonathan Barratt, chief investment officer at Ayers Alliance Securities in Sydney. Investors can trade spot gold, silver, platinum and palladium in London while traders in China, the world’s largest consumer and producer, can buy and sell bullion on both the Shanghai Gold Exchange and Shanghai Futures Exchange.

“The biggest problem you might have is with some of the agricultural products, because people rely on it quite heavily,” Barratt said by phone before trading resumed at CME Group. “You’re taking away a risk transfer mechanism that people rely on.”

(Updates CME Group’s stock price in 7th paragraph.)
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