Technical glitches on trading exchanges have become a reality for the contemporary financial world. “As we continue to eliminate human beings from the execution of security trading, this is the problem you run into,” said Stephen Massocca, managing director of Wedbush Equity Management LLC in San Francisco. “These events are going to take place, given the level of automation” (Financial Post).
The question mark on reliability of electronic exchanges has always been there, but it’s been amplified by the second trading halt on NASDAQ in the last three weeks.
Starting at 11:35 a.m. on Wednesday, September 4, investors were unable to see quotes in certain NASDAQ stocks for six minutes (CNN Money). The trouble came just two weeks after NASDAQ halted trading on almost 3,000 stocks for three hours (Financial Post). Irrespective of the fundamental reason, be it technical glitch or regulatory compliance, the trading halt has implications across all market participants. The halt locked up trading in stocks with a total market capitalization of 5.7-trillion USD (Market Watch). The sheer frequency and the impact on liquidity make it inevitable for traders to account for trading halt risk in their investment strategy.
Trading Halts: Implications for Market Participants
Trading halts impact all market participants, and the magnitude of impact may vary based on the level and purpose of participation. For example, in a very simplistic scenario, brokerage houses get paid by executing orders; so a trading halt would directly impact their revenue generation. Several “dark pools” which execute orders anonymously get forced to stop trading, leaving whole deals in jeopardy along with the risk of losing sensitive trade information. The risk of trading halt gains significance on special events such as famous IPOS, important news events (Federal Reserve announcements), and more.
“It’s positive that the market was actually up, [I] can’t imagine what would have happened if this was [Wednesday] when the Fed minutes came out,” as the Financial Times quotes Paul Hickey, co-founder of Bespoke Investment Group (RT). The Facebook IPO was in fact hit by a technical snag, resulting in protests from a large number of investors and regulatory scrutiny. These unexpected trading halt events impact risk managers and analysts, depriving their metrics and models of important data, which are supposed to serve as the backbone of risk management and trading systems.
Highly sophisticated models are both victim and cause of technical snags on the exchanges. Glitches in trading tied to high-speed computer algorithms have occurred frequently in recent years, with the so-called flash crash in May 2010 that marked the most widely noted instance of instability in the stock market’s infrastructure (Market Watch).
Takeaways
The biggest takeaway is to factor in the risk as a variable for these technical glitches while formulating trading strategies, as we can’t eliminate the odds of their reoccurrence. “The frequency of technical issues affecting trading is a wake-up call to business leaders in capital markets,” said Lev Lesokhin, executive vice president of Cast, a specialist in business software analysis (Financial Post).
Also, people relying on trade data such as risk managers and analysts should arrange for alternative data sources or set up a proxy to feed their risk management and trading software.At ZE, we always make sure that our clients have access to all the relevant data feeds. Our flagship data enterprise and management software solution, the ZEMA Suite, ensures delivery of more than 3,500 data reports through a single interface. To learn more about ZEMA, feel free to book a demo with one of our data experts today.