Koichiro Miyahara stood down as CEO of Tokyo Stock Exchange after an outage in October
Koichiro Miyahara stood down as CEO of Tokyo Stock Exchange after an outage in October © Soichiro Koriyama/Bloomberg

It sometimes takes the scare of a heart attack to make people to sit up and treat the underlying causes. And, on recent evidence, the same is true when the health of vital technology fails.

Last year, the financial equivalent of a cardiac arrest caused outages at several exchanges around the world — and jolted traders, resulting in a flurry of criticisms and the departure of one chief executive.

Then, in March, the European Securities and Markets Authority, the EU watchdog, weighed in, saying it was concerned by trading venues’ increasing reliance on third-party data and software to carry out critical functions.

But while exchanges are under increasing pressure to show their users and supervisors that they are improving their resilience, the ailing growth of their trading businesses is making the easiest remedy — more investment — harder to deliver.

“Exchanges are not taking enough responsibility,” says Niki Beattie, founder of Market Structure Partners. “The trading engine is no longer driving profitability and as a result people are taking their foot off the pedal.”

Deutsche Börse’s Xetra equities venue kicked off the spate of 2020 outages in April. A glitch bedevilled the German exchange again in July.

In October, a day-long outage at Tokyo Stock Exchange caused so much frustration that chief executive Koichiro Miyahara stood down.

In the same month, Euronext — operator of the Paris bourse — suffered its biggest outage for two years, forcing traders to sit on the sidelines for four hours. When trading finally resumed, Euronext botched the closing auction, causing knock-on effects to exchange traded funds and derivatives.

And, in November, Australia’s ASX lost almost a whole trading session to a software failure on the Nasdaq systems it uses.

While it is almost impossible to eliminate outages, state-of-the-art technology can help. However, it comes at a cost that is a drag on a trading business that, for many exchanges, is no longer considered “core”.

Euronext’s Paris exchange suffered its biggest outage for two years in September
Euronext’s Paris exchange suffered its biggest outage for two years in September © Nathan Laine/Bloomberg

Cash equities trading contributed less than a third of the revenue at Euronext last year, and less than a quarter of Deutsche Börse’s business, according to their annual reports. At ASX, this trading revenue was just 7 per cent of the total.

Exchange groups have instead diversified away from their origins in stock trading in the past decade, and moved into more lucrative post-trade and data business, as they seek to offset declining margins. Yet cash equities trading remains the most visible part of their business — and therefore makes headlines when it goes awry.

In response to the outages, the exchanges have sought to provide reassurance.

Deutsche Börse says that the reliability of its T7 technology is extremely high, adding that its Xetra venue has been available 99.98 per cent of the time since 1997.

ASX says using specialised third-party data and software providers was critical to operating resilient platforms. “ASX engages regularly with our customers and regulators about upgrading and contemporising our systems and technology,” a spokesperson explained. “This is an ongoing process for the benefit of the Australian financial market.”

Japan Exchange Group says it is focused on “improving resilience” and has developed rules to prevent a reoccurrence of its worst outage for 21 years, through measures such as drills. In April, it established a research centre to improve the design of its in-house system and supervision capabilities.

Euronext says that it seeks to identify, manage and mitigate risks associated with third parties by partnering with reputable technology firms, and via regular audits of technology, backups and business continuity arrangements.

But Beattie at Market Structure Partners reckons the technology is becoming increasingly complicated because third-party systems are implemented differently across exchanges.

“Exchange technology is like a dart board,” she says. “There’s the engine [bullseye], the middleware bit [surrounding it], and spaghetti that allows the exchange to function hanging off it [the wires between board sections] — and each part could go wrong,” she says.

For some market participants, this complexity means the solution lies in having a resilient system across venues rather than trying to eliminate individual outages altogether.

In March, market-maker Optiver published recommendations to soften the impact of exchange downtime. It called for standardised communication during an outage, alternative venues as a backup during the closing auction, and so-called interoperability — or the ability to move seamlessly between rival private clearing houses once a trade is executed.

In a paper this month, Cboe Europe, the largest alternative venue operator on the continent, and Aquis Exchange proposed an industry-wide plan to respond to primary market outages, which would see them handle much of the process following a glitch. 

This idea would establish Cboe and Aquis as designated “backup” venues for alternating six-month periods to handle the resumption of trading, effectively punishing the exchange suffering an outage by removing its responsibility. The plan centres on a price-forming auction event to give market participants the confidence to resume buying and selling stocks. 

Euronext declined to comment on an alternative venue for the closing auction but said that it supports standardisation in the way exchanges manage outages. It is currently working on a “playbook” to help the market better anticipate events during a technical disruption.

However, some warn that market participants will need to be realistic — even if money is thrown at the problem.

“There’s no quick fix to reassuring clients and regulators that it will be OK next time,” says Nicky Maan, chief executive of Spectrum Markets, a European derivatives exchange owned by IG Group. “Technology changes have long lead times and, once implemented, it takes time to regain trust.”

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