The London Stock Ex- change can take two lessons away from its Black Monday, September 8, when its trading systems were out of commission for almost seven hours: First, it’s hard to wrest liquidity away from a dominant market center, which the LSE indisputably remains. Second, the LSE had better take steps to avoid a repeat performance, because competing venues are ready to pounce to gain market share.
The outage, one of the worst ever suffered by a Western stock exchange, came at a particularly inopportune time. Financial markets, which were already jumpy, were opening to news of the U.S. bailout of mortgage agencies Fannie Mae and Freddie Mac. On the day that the LSE went off-line, the New York Stock Exchange turned over more than 6 billion shares for the first time since mid-July and the Dow Jones industrial average climbed 289.78 points, or 2.58 percent. In its only public statement on the matter, the LSE said that “a combination of technical events occurred simultaneously,” forcing it to suspend trading at 9:15 a.m. An attempt two and a half hours later to “reestablish connectivity” couldn’t be sustained, and only after 4:00 p.m. was the exchange able to conduct a closing auction.
LSE customers groused that the exchange was “stringing users along” with hopeful messages that trading would be restored sooner, according to one market source, who requested anonymity. Another observer says the outage exposed flaws in the LSE’s TradElect platform, which runs on Microsoft Corp. technology and has a capacity of 10,000 messages per second. Although the LSE plans to double that by year-end, it’s well below the 75,000-message peak capacity of competing platform Chi-X Europe.
Hoping to capitalize on an operational disaster of this magnitude — it also affected the Johannesburg Stock Exchange, which runs on TradElect — are Chi-X and others known as multilateral trading facilities under the European Union’s Markets in Financial Instruments Directive. But September 8 was not a great day for them either. MTFs’ volumes actually fell, reflecting how dependent the platforms are on price quotes coming from the LSE.
Chi-X, which was launched last year by Instinet and several bank partners and claims to be handling 20 percent of the daily volume of the FTSE 100 stocks, traded €3.5 billion ($5 billion) worth of shares on September 8, compared with €6.0 billion the next day and €5.4 billion the preceding Friday. Chi-X CEO Peter Randall says his 76 members couldn’t trade futures and options that are priced on underlying LSE quotes.
Volume on Turquoise, a nine-bank MTF that opened in August, “suffered as did others,” says CEO Eli Lederman, “even though we were functioning as normal throughout. The primary market still enjoys a special status for many participants.”
Alasdair Haynes, CEO of New York–based Investment Technology Group’s international business, says that the LSE has managed to maintain a level of price discovery that others can’t equal, but adds, “I’m not saying this won’t change over time.” Lederman is convinced that the exchange’s dominance “won’t last forever.” Financial firms are wary of “excessive dependence on any single platform,” he says, and “though it may take a while, one would expect people to be more venue-agnostic over time.”
Duncan Niederauer, CEO of NYSE Euronext, agrees that the outage “will focus clients on connectivity. We expect they will pay more attention to finding an alternative or two in each market.” Scheduled to launch a European MTF in November, NYSE stands to benefit if such a shift materializes. So do its New York–based archrival, Nasdaq OMX, whose Nasdaq OMX Europe went live late last month, and perhaps even the LSE, which has a alternative trading platform of its own, Baikal, in the planning stage.
Cubillas Ding, a senior analyst at Boston-based financial industry research firm Celent, says that broker-dealers and fund managers, too, have something to learn from September 8: They should have contingency plans in place so they are not vulnerable to a single point of failure. Lederman notes that many firms do not yet have “smart order routing systems that could deal with a no-primary situation.”
