Impact of Trading Outages

Terry Flanagan

Canadian broker-dealers end up dealing with the consequences when a trading platform suffers an outage.

On Aug. 31, Chi-X Canada experienced a system issue that resulted in the alternative trading system being shut down for the final hours of the trading day. The result was confusion for market participants, who ultimately had to bear the burden and consequences of the outage.

“At about 2:40, Chi-X stopped accepting orders and stopped allowing the cancelling of orders,” said Doug Clark, managing director of research at ITG Canada. “It was disappointing; (Chi-X) said it was the result of a change they had made to its execution logic. We had no previous guidance they were making this change. Since that time, they gave no clarity as to what the change was, or why it was needed. Anyone that had an order at the marketplace, could not get it back. Being unable to electronically trade, it is fairly painful when you get close to the end of the trading day.”

According to Clark, the official statement from Chi-X Canada was that a code change was made that resulted in a malfunction of their matching engine. But therein lies the problem. “Really, the marketplace does not have as much incentive to test these things, because they don’t bear any of the losses.”

Unlike in the U.S., where if a market goes down the trading platform or exchange is obligated to cover some of the losses, in Canada, there is no such risk to be taken by the markets.

“In Canada, dealers are forced to deal with every marketplace, and forced to sign contracts, that indemnify (the markets) from any liability,” said Clark. “We have no leverage to negotiate, because the regulators force us to trade on those venues. The dealers are left holding any losses, and the marketplaces have no liability whatsoever.”

That is a part of a bigger issue, Clark asserts.

“When these outages occur, they not only threaten (the marketplace where it happened), but it threatens to take down other vendors or dealers,” said Clark. “It puts everyone at risk. There’s not enough transparency. This put a lot of extra volatility and stress on systems that were already well stressed.”

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