From: Bloomberg
By Nikolaj Gammeltoft
U.S. options exchanges halted trading for about an hour after reporting a malfunction with the industry data feed for disseminating prices, days after securities regulators told market operators to find ways to make their systems more reliable.
CBOE Holdings Inc. (CBOE), NYSE Euronext (NYX), Nasdaq OMX Group Inc. and Bats Global Markets Inc. reported shutdowns that were later resolved. Exchanges said they had experienced an issue with the OPRA data feed.
“We have had customers who cannot see their bids and offers reflected in the marketplace,”Christopher Rich, head options strategist at JonesTrading Institutional Services LLC in Chicago, said in an interview.
The issue affecting options comes three weeks after the Nasdaq Stock Market halted trading due to concern about a price conduit serving multiple equity exchanges. In that halt, which froze trading in thousands of Nasdaq-listed stocks around the country, computer errors in the feed known as the security information processor, or SIP, led to the shutdown.
In the equity derivatives market, the Options Price Reporting Authority administers the dissemination of trade and quote information to brokers, investors and market-data vendors such as Thomson Reuters Corp. and Bloomberg LP, the parent of Bloomberg News. OPRA is managed by U.S. options exchanges and charges users for its data.
Stocks Slip
While trading continued without disruption on American equity markets, stock prices slipped around the time of the breakdown. 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 major 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 in serving 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.
Nasdaq’s Error
The gathering occurred three weeks after Nasdaq’s computers were flooded with data from NYSE Arca, a rival exchange, revealing a bug in Nasdaq’s SIP 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 the latest setback for American exchanges, which have faced criticism that the complexity of their electronic infrastructure leaves it vulnerable to breakdowns. In addition to the Nasdaq halt, options markets were roiled in August when Goldman Sachs Group Inc. bombarded exchanges with erroneous orders due to a computer error.
CBOE’s Outage
In April, the Chicago Board Options Exchange was down for 3 1/2 hours because of a software error that was 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.
Options volume surged more than fivefold in the past decade to 16.7 million contracts a day last year as demand for securities that protect against losses and speculate on the direction of stocks grew, according to data compiled by the Chicago-based Options Clearing Corp.
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.
Tighter Regulations
“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.
Under the limit-up/limit-down system implemented this year, stock trades aren’t allowed to take place more than a specified percentage above or below the average price over the preceding five minutes. If prices don’t move away from the limits within 15 seconds, the market declares a trading pause.
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