Yesterday, BATS Global Markets had to stop trading on its main stock exchange for about 50 minutes, while its counterpart, Direct Edge Holdings also experienced an unrelated disruption.
While the pair of outages was brief, they highlight the fragility and technical complexity of the nation’s 13 U.S. stock trading venues, and how a disturbance in one can impact the others.
According to the Wall Street Journal, BATS suffered a 50-minute outage, telling clients shortly after 1 p.m. EDT that it was investigating a "system issue" on its main stock-trading venue. BATS issued alerts notifying traders. From the Wall Street Journal:
Other exchanges quickly started routing orders away from the exchange, including BATS's own, smaller stock-trading venue. At 1:15 p.m., BATS said that its was no longer accepting orders on BZX until trading ultimately resumed at 2 p.m.
"We had an internal network issue, not a software issue, which caused trading on BATS BZX Exchange to cease for 50 minutes today," said BATS spokesman Randy Williams. "All systems were fully operational for the remainder of the trading day."
But the mishaps did not spell the end of the world – orders were electronically routed to the best prices at other exchanges rivals.
“At the end of the day, these are electronic marketplaces driven by technology, and certainly it’s not 100 percent foolproof, so we do expect stuff like this to happen,” said Sang Lee, managing partner at Aite Group in an interview today.
BATS’ smaller exchange, BYZ, issued an alert telling traders it declared self help against its sister exchange, BZX shortly after 1pm EDT. “Routing to BATS BZX Exchange has been suspended as of 13:04:29 ET,” stated the BATS alert.
An hour after BATS had its problem, a separate trading issue surfaced on the main exchange run by rival Direct Edge, which had a problem processing a group of stocks with the ticker symbols SPYV and TNC, according to the Wall Street Journal. Direct Edge informed traders via an alert that the matter was resolved less than 10 minutes later.
One of the advantages of the competitive, fragmented stock marketplace under Reg NMS is that there are procedures for handling technical glitches and there are other venues to trade on, said Lee.
“The key is when systems break down, whether it’s a software failure or network failure that the market venues work as quickly as they can to get their venues up quickly. There is a difference between a venue being down an hour versus a couple of minutes,” said Lee.
“It’s really a matter of exchanges having certain procedures in place, so when their platform is not accessible that they quickly notify their members or participants, so that the market overall can transition into other markets,” continued Lee. One positive of the fragmented marketplace is that when a specific venue is down, traders can route their orders to other places, he argued.
Also most of the exchanges have multiple licenses, including BATS and Direct Exchange, so they can continue to operate multiple platforms when one goes down.
Another advantage of the fragmented marketplace is that there are procedures for handling technical glitches and multiple marketplaces to trade on, said Lee. Having multiple market centers is a positive as long as everyone takes the right step in terms of canceling orders and routing to other venues, he said.
Technology mishaps are going to happen but the duration and frequency of incidents does matter, said Lee.
In BAT’s case, Tuesday’s network blip was the first system problem that lasted longer than one minute since the exchange operator had a software glitch in March 23, 2012 that caused it to suspend trading on its own initial public offering. But there have been several high profile technical issues since then, including Nasdaq’s botched Facebook IPO in May of 2012, and a software outage earlier this year at the CBOE.
So far, the market has been tolerant of these technical mishaps, especially since there are multiple venues. But if they were to happen every day or on busy days, the market would be less patient. “If a venue keeps breaking down hours at a time every single day, chances are firms will think twice about sending orders down there,” said Lee.