Following the SIX Swiss Exchange market outage last week, the marker maker has set forth a plan to protect participants from the impact of technical failures via an alternative pan-European closing mechanism – calling on listed exchanges to “set aside commercial considerations” for the good of the wider market.
Last week, SIX Swiss Exchange suffered an outage which involved the cancellation of both equity and fixed income trading for a three hours – its most serious outage in a decade. The halt was the latest in a string of market outages and technical failures – including a closing price failure for Nasdaq across four of its Scandinavian exchanges in November 2022 and a Euronext outage in October 2020 that saw a large chunk of the EU equity market frozen for several hours – whilst in the same month, Tokyo Stock Exchange chief Miyahara Koichiro resigned following a hardware malfunction that caused a day-long blackout.
A call to action
And now, one of the world’s biggest market makers is pushing back. In a new paper published on 20 June entitled ‘A plan for tackling closing auction outages’, Optiver issued a call to action for market participants to join forces to create an alternative pan-European closing mechanism.
“A technical glitch at one of Europe’s largest exchanges last week underlined the importance of being prepared for outages,” said Optiver. “While recent regulatory efforts have been aimed at outages during normal trading hours, more needs to be done to protect the closing auction. We support an alternative pan-European closing mechanism, but for it to work listing exchanges need to cooperate with their peers.”
Whilst there have been rumblings around activity moving away from the close and SIs internalising flows due to expense and volatility, the period remains the most important of the trading day. According to Rosenblatt Securities, end-of-day auctions attract around 15% of total European equity volumes — spiking to 25% on major option-expiry and index-rebalance days – making even the possibility of an outage a serious concern.
The regulator has taken note of these concerns – last month, ESMA published an opinion on how venues should handle a market outage: including a clear outage plan and a possible “order book purge” for compromised participants.
However, Optiver accuses the guidance of being “sparse” – instead calling on listing venues to “set aside commercial considerations” to act in the best interests of the market via an alternative pan-European closing mechanism.
Market concerns
There is a precedent for this in the US, where in November 2022 Cboe BZX Equities Exchange conducted a Contingent Closing Auction joint test alongside Nasdaq, NYSE, NYSE American, and NYSE Arca to provide a possible alternative in the event of a marketplace disruption preventing the primary listing market from executing a closing auction. Cboe designated NYSE Arca to be its alternative exchange for conducting close cross executions for Cboe listed securities, and during the test all firms were asked to send their closing auction orders to NYSE Arca. In 2016, Aquis also launched its own alternative closing mechanism, known as Market at Close (MaC), which it claims to be Europe’s largest closing auction.
Optiver acknowledges, however, that it could still take some time for players to “get comfortable” with the idea. For example, smaller or regional brokers might have to establish new direct or indirect market connections to an alternative closing auction venue and modify their post-trade set-ups, while the back-up auction operator may need to admit securities that it does not already offer for trading. It may also have to distribute additional closing-auction data, which could lead to greater costs for trading firms.
Industry action
But “these challenges are hardly insurmountable” said Optiver, and proper testing by market participants would go a long way toward overcoming them.
“What’s clear is that a market-backed alternative closing auction would be more reliable than other solutions like delaying the close or using the last traded price,” said Optiver (both of which were suggested in the recent ESMA consultation paper on market outages.)
The market maker also claims that a back-up auction would deliver better outcomes than the long-proposed pan-European consolidated tape.
“If an auction is delayed too far into the evening it could wreak havoc on stock options exercise prices, which generally expire in the early evening,” it warned. “This could prevent options market makers from properly hedging their exposures, potentially leading to significant market shocks. The last traded price or consolidated tape also may not be accurate closing-price benchmarks, especially if an outage occurs early in the day and market-moving news hits in the interim.
An alternative option
Optiver is urging industry-wide cooperation, including between listings exchanges themselves as well as derivatives-market operators, mutual fund and ETF issuers, who would need to recognise the prices set by an alternative closing facility as a benchmark for their products. It is also calling on regulators to “speed this along” by mandating stock markets to designate responsibility for closing auctions under outage conditions.
But not everyone agrees.
Natan Tiefenbrun, president of Cboe Europe (whose parent company Cboe Global Markets recently launched its own primary listings business) agreed that the paper highlighted a “clear and present danger”.
However: “Asking each exchange to make their own arrangements for an alternative closing auction operated by a peer might be too complex – especially given that exchanges don’t tend to support trading or clearing of one another’s stocks. It might be more achievable for a pan-EU player like Cboe or Aquis – which already admit the instruments to trading – to act as a backup provider to all the exchanges,” he explained to BEST EXECUTION.
“Alternatively – if one wants to minimise operational risk for all concerned, it might be best to choose a model that does not require trading participants to use a new market mechanism. For example, we could leverage the Consolidated Tape to publish a VWAP for the last 5 minutes of continuous trading across all venues, which could be used as the Official Close in case the listing venue is unable to run an auction.”
Watch this space as we follow up in the coming days with responses and perspectives from participants across the industry on this key issue.
©Markets Media Europe 2023
