Common issues that have compounded the impact of recent outages continue to be largely overlooked by some exchanges.
Citadel Securities has published a new paper offering recommendations on best practices to mitigate the impact of outages at exchanges and enhance overall market resiliency.
Within the last 12 months, outages have been suffered by the NZX, TSE (Tokyo Stock Exchange), Euronext, ASX and NSE (National Stock Exchange of India).
According to the paper, a review of recent outages has highlighted several common issues which compounded the impact of the outages. Although many of these issues were later rectified at the exchanges that experienced outages, they continue to be largely overlooked by exchanges where outages have not occurred, it says.
In particular, the paper highlights insufficient or ineffective communications from exchanges to market participants as a common shortcoming witnessed across most recent outages. In this regard, significant delays in public announcements by exchanges, and the lack of centralised and dedicated portals or pages for the dissemination of critical updates in a timely and effective manner, were among the key observations.
The paper says communications should be clear, succinct and frequent, with horizontal silos removed. “Thorough and timely communication during outages is critical to preserving investor confidence and limiting the cascade of secondary complications.”
Slow or unclear trade and order cancellation processes were another common shortcoming experienced during exchange outages. “The lack of clear and explicit policies and playbooks for trade and order cancellations leaves market participants without vital information regarding their positions and risk exposures,” the paper says.
“A lack of specificity and discipline around trade / order cancellation procedures represents unacceptable market and operational risk to market participants that impairs the fair and orderly functioning of markets which rely on transparency and certainty.”
In recent outages, known duplicate trades persisted without clarity on cancellation status/process, and in some cases trades were not cancelled until multiple days after the incident. The paper recommends that order and trade cancellation playbooks and policies be clearly established and communicated with market participants prior to an event.
Another common shortcoming witnessed across most of the recent outages was mismanaged market re-openings. Where market re-opens were rushed, duplicate trades and other issues led to more risk than if the market had stayed closed longer. Where market re-opens were slow, a lack of information and communication on re-opening expectations prolonged uncertain market and operational risk for participants and uncertain financial risk for investors.
The paper recommends that market re-open policies be developed and communicated in advance, and that market re-openings should be communicated with adequate notification to participants, following effectively evaluation and risk assessments.
In addition, governance structures should be regularly reviewed and input from internal and external stakeholders on items including exchange issues, strategic development, rules, and outage playbooks and scenario plans should be regularly and formally solicited.
The paper says policymakers and regulators should consider further market structure reforms that minimise single points of failure and lessen dependencies on any one exchange, in order to enhance the resiliency of the broader market ecosystem.
Specifically, alternative venues that can handle material trading volumes and critical functions (e.g. closing auctions) as well as backup systems to disseminate market data should be used should be used to promote market resiliency and stability.
The full paper is published here.