NYSE Outage

Yesterday's outage at the NYSE is perfectly normal and did not really matter.

The lesson we should have learned is simple:

Instead of wringing our hands over technology and trying to legislate perfection, we should embrace the fact that our competitive system provides redundancy. The fact that all other exchanges and ATSs were able to trade normally, meant that the market operated efficiently for all stocks, for the entire day. Claims in the media about "unnerved" traders notwithstanding, we should use this event to put an end to the calls for legislated exchange monopolies and anti-competitive rules. If listing exchanges were given a legislative monopoly - per Macey and Swenson's ridiculous WSJ article- investors in NYSE listed issues wouldn't have been able to trade for most of the day.

In addition, despite Luddites that continue to blame technology and complexity for market problems, let's recognize that technology also solved the problem. The mass availability of smart order routers and competing market centers meant that only the most hidebound investors had trouble trading yesterday. Unless investors trade exclusively with brokers that do 100% of their business on the NYSE, they would not have been impacted. While some have suggested that resting limit orders on the NYSE were impacted, they need not have been. If the firm who sent those orders used a feature called "cancel on disconnect" the NYSE would have been obligated to cancel those orders. That would have freed the routing firm to place those orders on competing venues. (Many did so, and the NYSE worked extremely diligently to manually cancel roughly 700,000 orders, which is why the impact was so minimal)

Rather than conducting another witch hunt against technology, let's recognize two, unassailable, facts:

1. Mistakes happen - human error, hardware and technology failure, there will be failures.
2. Redundancy is essential - We should focus our efforts on eliminating single points of failure, rather than arguing about rules to protect monopolies.

More specifically, the following areas should be addressed:

1. Make the consolidated tape (SIP) truly competitive. It is hard to justify why we still rely upon an archaic, monopolistic data feed, operated, exclusively, by the NYSE and NASDAQ, instead of a redundant, competitive system for publishing market data. The reason, of course, is money. The exchanges benefit, both directly from collected fees that are distributed by the National Market System and indirectly by selling direct feeds that they are 100% certain can outcompete the consolidated system.
2. Allow competing exchange auctions the same exemptions to Regulation NMS and allow issuers to choose a "backup primary" exchange. This change would ameliorate the situation where a primary exchange failure at the open or close, prevented investors from trading at the two most important price discovery points. Had the NYSE failed to bring their systems up before the close yesterday, mutual funds and other products that depend on the "closing price" to calculate NAVs, would have had significant problems. The only way to prevent that situation is to have a competitive, redundant market system.

It's time to embrace the progress that technology has brought to the markets and stop demonizing it. This is particularly true as we progress towards the implementation of Regulation SCI, which is designed to force markets to follow "best practices" in technology implementation. While I believe this will help, we also need to understand that there is no panacea that will prevent all errors. Thus, we are left with two choices: embrace progress and push forward with technology as a solution or embrace hysteria and fall backwards into despair...

David Weisberger, Managing Director, Trading Services at Markit
Posted 9 July 2015

S&P Global provides industry-leading data, software and technology platforms and managed services to tackle some of the most difficult challenges in financial markets. We help our customers better understand complicated markets, reduce risk, operate more efficiently and comply with financial regulation.

This article was published by S&P Global Market Intelligence and not by S&P Global Ratings, which is a separately managed division of S&P Global.