Software glitch delays trading

Trading on the Chicago Board Options Exchange was delayed for more than three hours Thursday due to a software glitch, once again highlighted the fragile nature of making money trading.

Here are some of the details from Bloomberg:

The Chicago Board Options Exchange opened for trading three-and-a-half hours late today after a problem with its computer systems shut the derivatives market as its top executives gathered for an industry event in Las Vegas.

CBOE Holdings Inc (CBOE).’s exchange, which accounts for about 25 percent of options trading, said the technical problems were not the result of a computer hacker, spokeswoman Gail Osten said. Ed Provost, chief business development officer, said at the conference that a “software glitch” caused the outage. Trading in Standard & Poor’s 500 Index products started at 12:50 p.m. New York time and the rest of the exchange opened at 1 p.m. rather than the usual 9:30 a.m., CBOE said.

CBOE is the exclusive venue for options based on the Standard & Poor’s 500 Index and the so-called VIX (VIX) gauge of volatility. The delay highlights the fragility of U.S. equity exchanges in a week when a false report of explosions at the White House briefly wiped out $136 billion from the S&P 500 in about two minutes.

“We are doing zero business,” Greg Richards, who trades VIX and S&P 500 options as an institutional broker at Chicago- based PTR Inc. on the CBOE floor, said in an interview during the shutdown. “It is not good for the CBOE in a competitive atmosphere.”

The Wall Street Journal offered this context and what the delay could mean for the CBOE and the industry:

The system outage at CBOE was the latest in a spate of technology outages that have raised questions about the stability of the complex computer networks that underpin business in U.S. financial markets. The issues also came as CBOE’s functions as a regulator have been the subject of an investigation by the Securities and Exchange Commission, which is scrutinizing whether regulatory officials at the exchange maintained a too-cozy relationship with some customers.

The delayed opening meant that two critical tools for hedging stock-market risk—options on the S&P 500 index and the CBOE Volatility Index, or VIX—were unavailable to banks, institutions and trading firms on Thursday morning. Both options are traded solely on the Chicago-based exchange.

Financial firms had to hunt for alternatives such as options on similar exchange-traded funds, though traders said these generally are imperfect substitutes.

“Not being able to trade the VIX and SPX is a big deal,” said Mark Sebastian, chief operating officer of Option Pit, which provides tools for stock-options traders.

In communications with traders, the exchange cited a “download problem,” according to one trader who had received the message. An SEC spokesman said regulators were “monitoring the situation.”

The trading outage affected both floor and electronic trading, prompting several traders to complain that during past electronic outages, CBOE’s physical trading floor had been able to carry on.

“Unfortunately, all the traders that are there to provide liquidity were here this morning, but because of the evolution of electronic trading, customers couldn’t trade in and out of their positions this morning on the CBOE, which is pretty sad,” said Gavin Farley, an options trader for CMZ Trading, who works in the S&P options pit.

CNN Money quoted one trader as saying it was actually not that big of a deal that the exchange experienced delays:

Just days ago, on April 16, the exchange broke its record for volume, with 1,399,863 contracts changing hands.

One options trader, the head of trading at a major investment bank, said it wasn’t that unusual to see a trading delay in one of the 11 exchanges on which options are traded.

He says these types of delays happen once a month.

It’s generally not too disruptive since banks can just reroute orders from one exchange to another.

I find that argument a bit hard to believe since it’s the only exchange that trades VIX. Also, anytime confidence in the system is rattled, it’s a blow to the whole industry. While the problem likely had little effect on individuals, banks are likely seeing yet another weakness in the system with certain options only traded on one exchange. It will be interesting to see if some of the other exchanges try to step in and grab more share after today’s glitch.