Although Sept. 8 was expected to be a profitable trading day due to the U.S. government's bailout of troubled mortgage lenders Freddie Mac and Fannie Mae, traders in London were left without the ability to trade at all. The London Stock Exchange had to halt trading for seven hours after its trading system encountered problems. Many traders couldn't see prices after the first hour of trading, leaving them frustrated and, more important, without the gains the rest of the market experienced as the markets rallied.
When I asked industry experts and exchange competitors how this could happen to a major exchange, I was surprised that they responded with empathy. One even said, "This could have happened to anyone," noting that the system that failed is only 18 months old.
I sat down with BIDS CEO Tim Mahoney the following day and talked to him about it. Unprompted, he said simply, "I felt bad for them." He added, "All of us [with dark pools, ECNs or exchange trading systems] know that could have been us. This job isn't easy."
Keeping technology running 24x7 and ensuring it is reliable is anything but easy. The world of trading is so dependent on technology that one glitch could mean the end of a good reputation, the end of users' trust and the end of a profitable business. And it can happen in an instant.
Three days later, on Sept. 11, BATS Chairman Joe Ratterman sent an e-mail to the industry in which he noted the importance of resiliency. "We are sympathetic towards the LSE for having suffered an outage earlier this week," he wrote. "In a world in which technology is at the core of nearly everything we do, outages are a fact of life for all market centers. Some of the outages in our industry aren't even foreseeable or preventable. Nobody is immune, BATS included, despite the immense investment that we all make in Disaster Recovery and Business Continuity plans. What is unfortunate is that the recent LSE outage impacted a large portion of the greater U.K. securities industry."
In other words, because the LSE essentially monopolizes the market, the impact of its system failure hurt more than the exchange. Many traders had nowhere else to turn to trade. If there had been greater adoption of some of the nascent multilateral trading facilities, or if the MTFs had a wider net of linkages, perhaps the LSE's outage would not have hurt quite so much. The incident gives the market an opportunity to consider pushing for the growth of alternative trading systems. It's also an opportunity for new European MTFs to grab a share of the market. After all, competition in itself is a form of resiliency.
The LSE will bounce back and will likely spend a good portion of its technology budget on backup systems and testing. For good or for bad, the misfortune of the LSE could turn into a boon for the industry if it helps reshape market structure, bring more competition to Europe and push all electronic systems to invest more in the resiliency of their technology.