“Falling like dominoes”: Could NYSE trading halt lead to industry FIX?

The halting of trades by the New York Stock Exchange (NYSE) on 6 May 2024 had a domino effect, rippling out across a number of exchanges, dark pools and alternative trading systems (ATSs) in the US. The NYSE halt was reportedly the result of issues with limit up/limit down price bands related to a new software release on the consolidated tape. But could the market chaos finally lead to a more effective industry solution to market outages?

The Consolidated Tape Association (CTA), which oversees the dissemination of real-time trade and quote information in NYSE listed securities, operates the Security Information Processor (SIP), which links the US markets by processing and consolidating all protected bid/ask quotes and trades from every trading venue into a single, easily consumed data feed.

The SIP disseminates and calculates critical regulatory information including the National Best Bid and Offer (NBBO) and Limit Up Limit Down (LULD) price bands among other important information such as short sale restriction and regulatory halts. Many alternative trading venues use SIP to price their trades. And when this is dysfunctional, it can have a ripple effect.

Larry Tabb, head of market structure research at Bloomberg, explains: “When the SIP has problems, it becomes hard, if not impossible to execute at the right price. Now these ATSs may not just use the SIP to price, they may use a combination of direct feeds and the SIP, but if a major component of your pricing feed goes then, same as above, it may impact how you price dark midpoint orders.

“As for only using the SIP, given the time delays inherent in the distribution of the SIP, I am not sure that is the best way to price orders, but, using it as a component, is probably the right strategy.”

Monday’s events have seen calls for better communication from exchanges when trading halts occur, with an emphasis on leveraging FIX to inform market participants.

Venues react

A NYSE spokesperson told GT: “After the market opened on the morning of 3 June, 2024, a technical issue involving industry-wide price bands published by the Consolidated Tape Association’s Securities Information Processor triggered “limit-up/limit down” trading halts on up to 40 symbols listed on NYSE Group exchanges. Shortly before noon, the issue was resolved and trading in the impacted stocks resumed. The NYSE is reviewing potentially impacted trades.”

Trading halts on the NYSE are disseminated in real-time on the firm’s market data feeds, which clients/market participants receive. They are also published on a dedicated trading halts webpage.

The CTA also issued a statement regarding the incident on Monday: “Between 9:30 a.m. and 10:27 a.m., CTA experienced an issue with limit up/limit down price bands that may have been related to a new software release. To resolve the issue, CTA failed over to the secondary data centre, which operates on the previous version of the software. The following symbols that were subject to trading pauses on CTA between 9:30 a.m. and 10:27 a.m. were potentially impacted by erroneous price bands due to this software release: CTA SIP Symbol LULD Halt June 3 2024 – Corrected.”

“In other words, CTA had a software glitch that changed the LULD price bands in more than 40 securities,” Joe Saluzzi, partner and co-founder at Themis Trading, said.

Saluzzi said that it was his understanding that the CTA sent out erroneous price bands, which were far away from the accurate price bands, for over 40 stocks, which caused brokers to cancel orders once the message hit their data feeds, essentially wiping out the limit order book in the affected stocks.

“Even though the limit books were wiped in some stocks, these stocks were not halted until trades started occurring at the new LULD prices for at least 15 seconds (this is the way the LULD rules are set up to work),” Saluzzi explained in a Themis Thoughts.

GT understands that due to the fact the NYSE had to halt trading, this caused the dark pools and ATS that quote prices from NYSE to go down as well.

“IEX determined that the quotes were not updating due to a latent software defect that impacted its SIP Publisher application responsible for disseminating quote information to the CTA SIP for symbol range A through D,” said the firm. However, according to a confirmation from an IEX spokesperson, there was subsequently an additional software defect within the IEX platform following the fail over to secondary after the original NYSE glitch. “IEX Technology is currently in the process of updating system code to address the issue. In the meantime, IEX’s failover procedure has been augmented to address this situation until the software fix is developed, tested, and deployed,” the firm told GT.

Industry sources suggest that the bigger issue is that this situation could easily be resolved much faster in the future, if a message was sent out on FIX to inform market participants. However, there are some exchanges that have historically blocked/opposed this, GT understands.

A solution?

Jim Kaye, executive director, FIX Trading Community, told GT that FIX is working on a solution to the market outage communication issue.

“The timing is completely unrelated to the US equities outage, and though outages of any kind are obviously not desirable, they are inevitable. Also, each one is different and provides us with another case study for us to test our design against.

“One thing our work has highlighted, and this recent example confirms, is that an outage can occur anywhere in ‘the system’ and impact any other part of ‘the system’. Here ‘the system’ could be anything from an actual IT system to a venue or market participant, to a market, to the entire financial ecosystem. Here, a market data issue impacts trading in several US shares which no doubt had a knock-on effect on derivatives, other shares, markets, possibly even other asset classes.

“Communication needs to come from any part of the system to, potentially, any other part of the system. It needs to be timely. And the really hard part is it needs to be honest and accurate. ‘Honest’ means if you aren’t quite sure what’s going on (often the case in the early stages of an outage), say so. Accurate means you need to be 100% sure of your facts and communicate them clearly,” Kaye added.