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CBOE Explains Systems Outage was Due to a Software Bug; Expert Says More Needs to be Done to Prevent Incidents

One software expert said that CBOE's software problem was a sign that exchanges are rushing out software and that the SEC needs to do more with compliance to set a level playing field.

After yesterday’s systems glitch, The Chicago Board of Trade had a normal opening for trading today, but reporters were still curious as to why it took three and half hours to open the main CBOE electronic trading system and floor.

In an interview with CNBC this morning, William Brodsky, chairman and CEO of the CBOE was asked about the nature of the software problem and whether it was related to a software upgrade. “This was a software bug. It wasn’t any sort of hacking incident and these things happen with a software company,” said the CEO.

Yesterday, CBOE, the nation’s largest options exchange by volume was prevented it from trading its major stock index options contracts, SPX and the CBOE Volatility Index or VIX, impacting institutional customers that rely on these contracts to hedge their portfolios.

In a letter to clients and shareholders posted on its web site, CBOE expressed its regrets for the system outage that delayed the opening and said it had isolated the software issue that caused the problem and have made the necessary adjustments for a normal opening today. It also said it was conducting an ongoing and thorough internal review of the software problem to prevent something like this from happening again. Moreover, it wrote that the issue was in no way related to a cyber-attack.

However, CBOE has been somewhat vague about the nature of the software problem. When pressed by CNBC, Brodsky said this was not a software upgrade. This was something that cropped up unexpectedly and our guys isolated it. It took longer than we thought,” he said.

While there were multiple attempts to open the exchange, trading was not opened until 11:50 am central time or 12:50 eastern time. One question is did the exchange have redundant systems and could it have shifted these contracts to another platform. The SPX – heavily traded options on the S&P 500 index —is traded in the open outcry pit on the floor and the main CBOE system.

Although CBOE also operates C2, an all-electronic exchange, it was not able to move the SPX or VIX contracts over to that platform. “Moving a product from one exchange to another has operational hurdles, which would require time to get done – e.g., notice to OCC,” according to a CBOE spokesperson via email. A few years ago, CBOE had created SPXpm, a different, contract to trade on C2 that would compete with the SPX. SPXpm moved from C2 to CBOE in February 2013. So all of the SPX options products are now traded on CBOE.

According Brodsky on CNBC, the options market has different issues than the stock market like spread orders and other things. “You have to make sure when you reopen that you purge the orders out of the book and reenter orders,” he said. “We’re going to do a thorough review and my guess is if this would happen again we would approach it differently,” he told CNBC.

Brodsky also said that the exchange did not violate any SEC procedures and that it had a briefing with the SEC yesterday. He said the exchange would “I don’t think there is SEC procedures against technology breakdowns. I don’t think there were any violation of the rules,” said Brodsky on CNBC.

Noting that customers were unhappy that they couldn’t trade the option contract on the S&P index or the VIX, CNBC’s reporter asked the CEO if there could be legal actions. Brodsky reiterated that every company has technology problems and he pointed to the CBOE’s record: “We’ve had the first significant system outage in 12 years yesterday,” said Brodsky and noted that the exchange had a normal opening today

But according to Lev Lesokhin, SVP at Cast Software, a software analysis and measurement company that services financial institutions, CBOE has been “more tight-lipped than usual” about the software bug and now is doing damage control.

Ivy is Editor-at-Large for Advanced Trading and Wall Street & Technology. Ivy is responsible for writing in-depth feature articles, daily blogs and news articles with a focus on automated trading in the capital markets. As an industry expert, Ivy has reported on a myriad ... View Full Bio

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