The Day The Market Crashed - The Sequel

Via Joe Saluzzi and Sal Arnuk of Themis Trading,


In August 2013, the Nasdaq SIP  broke and trading in Nasdaq stocks was halted for 3 hours. Yesterday, at 1:07 PM ET, the NYSE SIP broke but trading was allowed to continue until the backup facility was put on line (above is a graphical representation of the outage from Nanex).  The NYSE SIP is overseen by the policy making body known as the Consolidate Tape Association (CTA). According to the CTA:

“The New York Stock Exchange LLC is the Administrator of Network A and NYSE MKT is the Administrator of Network B.”?

If you are not familiar with the CTA , here is a brief description of who they are:

The Consolidated Tape Association (CTA) oversees the dissemination of real-time trade and quote information in New York Stock Exchange LLC(Network A) and BATS, NYSE Arca, NYSE MKT and other regional exchange (Network B) listed securities. Since the late 1970s, all SEC-registered exchanges and market centers that trade Network A or Network B securities send their trades and quotes to a central consolidator where the Consolidated Tape System (CTS) and Consolidated Quote System (CQS) data streams are produced and distributed worldwide.”

Here is part of the statement that the CTA published yesterday concerning the NYSE SIP outage:

At approximately 1:07 PM ET, there was a network hardware failure impacting the CTS/CQS/OPRA data feeds at the primary data center. At approximately 1:34 PM ET, after investigation of the issue, SIAC made the determination to switch over to the secondary data center in Chicago for the CTS/CQS data feeds and then the OPRA data feed.  Normal processing resumed in Chicago at approximately 1:34 PM ET for CQS, approximately 1:37 PM ET for CTS, and approximately 1:41 PM ET for OPRA.”

For at least 27 minutes, the SIP which processes Tape A and Tape B stocks was not working properly. This means that any dark pool, stock exchange or retail broker which relies on the SIP for public quotes was pricing off of incorrect quotes.  Of course, any firm which pays for exchange direct feeds was still pricing off of accurate information. Therefore, for at least 27 minutes, an “information asymmetry” existed.  You may remember the term “information asymmetry” from last year’s Nasdaq SIP outage when the CEO of Nasdaq said:

We knew professional traders had access to individual data feeds, but the traditional long investor, retail investor now didn’t have the same information, because of that, we halted the market.  The high frequency firms would have access to proprietary feeds from individual exchanges. The consolidated feed which we operate had a problem, wasn’t giving quotes out.  We had to halt the market because of that.  We didn’t want to have a situation where information asymmetry, as you say.”

?Apparently, the NYSE didn’t think it was necessary to halt trading in their listed stocks.  But some dark pools took responsibility and decided to halt trading at their venues.  According to Bloomberg , “ITG had to close its Posit dark pool for about 30 minutes and Goldman Sachs Group Inc. briefly halted trading in its Sigma X dark pool.”  This makes us wonder about all the other venues that did not halt trading yet rely on the NYSE SIP for pricing.

-          Did their customers receive accurate pricing?

-          Were retail market orders, which normally receive sub-penny price improvement, priced off of incorrect and stale quotes?

?In addition to possible pricing errors, there was another situation which occurred right in the middle of the SIP outage.  At 1:19:19 PM ET, an extremely high number of trades occurred in the E-Mini futures contract.  According to Nanex, there were 15,263 contracts that traded during this second.  Almost immediately, quote and trade levels spiked on the US equity markets in reaction to this e-mini barrage of trades.

-          Were these E-Mini trades placed to take advantage of the misplacing in the equities market?

-          Could the E-Mini’s trades have been put through to ignite momentum in a stock market which was already suffering from a liquidity issue due to the lack of correct quotes?

Unfortunately, we don’t know the answer to these questions and doubt that our regulators (even if they knew to ask these questions) would have the data to find the answers.  Since the CFTC regulates the E-Mini futures and the SEC regulates the stock market, they maintain two sets of different data.  This was evidenced clearly after the May 2010 Flash Crash when it took a Joint CFTC/SEC committee almost 6 months to analyze 45 minutes of trading.

We live in a cross-asset world where high speed traders routinely position multiple asset classes. Unfortunately, our regulators still seem to live in a single asset world.  We believe that the CFTC and the SEC should create a Joint Task Force which could quickly be put into action when events like yesterday occur.  This task force would be able to share and compare data to determine if any nefarious behavior caused or took advantage of an outage.

One last ironic point about yesterday’s SIP outage.  At the exact same time the outage was occurring, an Exchange Leaders Panel ?at a SIFMA event in NYC was just kicking off.  The session was billed as:

This session will explore the competitive, structural and regulatory landscape that Exchanges operate in today, and the challenges and opportunities facing the industry in the year to come.”

No doubt those exchange leaders have some more challenges to address now.