Nasdaq spends 40 out of 52 weeks testing systems for disaster recovery, including major catastrophes such as a pandemics, which has allowed the exchange and the 120 marketplaces it supports to continue operating as volatility and volumes have increased.
Paul McKeown, senior vice president, head of marketplace operators and new markets, Market Technology at Nasdaq told Markets Media that the firm provides technology to more than 120 marketplaces, clearinghouses and central securities depositories in 50 different countries.
“It is a huge responsibility to provide financial market infrastructure and we are well prepared to support both our own markets and those markets that we support on behalf of our customers,” he added. “We spend 40 out of 52 weeks testing our systems for disaster recovery, including major catastrophes such as a pandemics, and with the assumption that all global markets could be impacted at the same time.”
McKeown continued that there have been no major issues in the last few weeks despite the increase in volatility and volumes due to the impact of the Covid-19 pandemic.
He said: “As a rule, we make sure we have two times the capacity of the highest trading volumes we have seen for all our customers on a global basis. We are laser focused on capacity, performance and resilience.”
Adena Friedman, president and chief executive of Nasdaq, said:
I’m so proud to see the Nasdaq team around the world rise to the occasion. We’re looking out for each other and we’re continuing to get the job done for all of you who rely on us. https://t.co/bVjqTZ7jEr
— Adena Friedman (@adenatfriedman) April 1, 2020
Nasdaq’s market operations team includes 40 engineers responsible for monitoring all systems. The group is used to remote working from home.
“We also have more than 1,500 dedicated technology staff covering support, development, testing and operations,” he added. “We are well placed to operate 24/7 for 365 days a year.”
Surveillance
Nasdaq also warned that market manipulators can take advantage of the chaos during stressed markets to attempt to hide amongst the noise, assuming that it is harder to hide their behavior amongst the increased activity.
Michael O’Brien, head of product management, risk and trade surveillance at Nasdaq, and Alan Jukes, principal product manager of Nasdaq Trade Surveillance, said in a blog that they expect to see one, if not multiple, cases of manipulation during this period.
What happens when trading volumes triple?
— Nasdaq Exchange (@NasdaqExchange) March 20, 2020
Our surveillance team talks about what is needed to monitor through the noise: https://t.co/kqKvGHKAwk pic.twitter.com/fCwnbYEMyT
“Looking back, one well known example of blatant market manipulation correlated to a period of extreme market volatility (some would even argue causation) is the Sarao case during Flash Crash of 2010, when over a trillion dollars dissipated in just over 20 minutes,” they added. “Several attributes of Sarao’s trading were flagged as indicators of market abuse, many of which the executing brokers failed to detect and query.”
The blog continued that surveillance analysts need to be wary of a default assumption that alert spikes are simply a reflection of increased market activity, or due to the ‘normal’ response of an algorithm to increased volatility.
“Firms must be prepared to challenge any trader that claims their behavior was due to abnormal market conditions, and the key to being able to challenge that is to look at their behavior relative to their peers,” they explained.
World Federation of Exchanges
McKeown said: “Regulators have done a good job in making sure that exchanges are appropriately prepared and that has helped make our lives easier.”
The World Federation of Exchanges, the global industry group for exchanges and CCPs, issued a statement on market infrastructure business continuity planning last month.
Exchanges and CCPs have triggered continuity plans (remote working and working from secondary sites) to ensure their operational resilience and ability to serve their markets. Read our statement on Covid-19 and market volatility here: https://t.co/p9ZLeY0oAZ pic.twitter.com/VMpItuTDyT
— TheWFE (@TheWFE) March 19, 2020
“As a community, market infrastructures are both prepared and focused on ensuring the regulated markets remain open, resilient, reliable and consistent at this time of crisis,” said WFE. “Indeed, this has been demonstrated time and time again, including in 2008 when our industry stepped forward to secure the system in the wake of the bank-led crisis triggered by the Lehman Brothers bankruptcy.”
The WFE has created a repository of the rolling updates of exchange and CCP efforts on its website and collaborates via the WFE’s Enterprise Risk Working Group.
“You may wish to refer to their recently published benchmarking exercise on Organisational Structures for Enterprise and Operational Risk,” said the group. “Separately but in tandem, the WFE’s Cyber Security, CCP and Physical Security Working Groups are also working during this crisis with similar models.”
The Financial Stability Board
The Financial Stability Board, the international body that monitors and makes recommendations about the global financial system, also reviewed the actions taken to support market functioning and maintain the provision of credit to households and businesses at the end of last month.
FSB members take action to ensure continuity of critical financial services functions during #COVID19 https://t.co/p9wnF7VMrv pic.twitter.com/LaM4TU7YwB
— The FSB (@FinStbBoard) April 2, 2020
“Many financial firms have successfully managed to switch to extensive remote working in a relatively short time,” added the FSB. “Nevertheless, for many financial service firms to continue to operate critical functions, a limited number of essential personnel are required to be on-site.”
The FSB continued that public health authorities have implemented social distancing measures, firms must have appropriate business continuity plans in place to respect these measures and facilitate working from home where possible.
