CBOE opens after 3.5-hour systems malfunction shuts exchange

Software malfunction reason for delayed open.

The Chicago Board Options Exchange opened for trading three-and-a-half hours late today after a software malfunction shut the derivatives market as its top executives were away at an industry event in Las Vegas.

CBOE Holdings Inc.’s exchange, which accounts for about 25 percent of options trading, said the technical issues 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 malfunction caused the outtage. 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.

“We had some technology problems this morning,” Provost said in a panel debate at the conference. “It’s a software glitch and we’ll identify the problem.”

While most equity-derivatives contracts are traded on multiple exchanges, which boosts competition for the quoted price of bids and offers, CBOE is the exclusive venue for options based on the S&P 500 Index and the so-called VIX gauge of equity volatility.

“There is no alternative to VIX other than over-the- counter trading,” Mark Sebastian, director of education at Option Pit Mentoring in Chicago, said in an interview. “This makes hedging very difficult.”

Vegas Huddle

Bill Brodsky, chairman and chief executive officer of CBOE Holdings, and Provost are at the Green Valley Ranch Resort & Spa in Las Vegas, Nevada, where they are attending the annual Options Industry Conference. While their exchange was shut, the two read from their smartphones in a huddle of CBOE executives outside the resort where traders and exchange officials from throughout the options industry gathered for the event. CBOE Chief Branding Officer Carol Kennedy blocked a Bloomberg News reporter from approaching the two for comment, referring him to a press release.

About 450 people were in attendance at the conference with representatives from firms such as Goldman Sachs Group Inc. to BlackRock Inc. to Group One Trading, the primary market maker for VIX options.

Shares of CBOE were up 29 cents, or 0.8 percent, at $36.74 as of 2:42 p.m. in New York after losing 0.4 percent earlier. The stock is up 25 percent this year.

‘Sarcastic Cheer’

The open of the exchange in Chicago was greeted with a “sarcastic cheer” from floor traders, according to Jim Phillips, who works at DSM Trading and trades futures and options in the S&P 500 pit of the CBOE.

“They razzed the guy giving the updates,” said Phillips, 28, in an interview outside the exchange. “I just couldn’t believe it was happening. Just unbelievable that it could be compromised so quickly.”

The Securities and Exchange Commission was monitoring the situation “as is our practice,” spokesman John Nester said. The delay highlighted 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.

CBOE Futures Exchange, C2 Options Exchange and CBOE Stock Exchange were operational, the company said. The company runs two options markets, a stock exchange and a futures bourse.

CBOE published its first notice about technical problems experienced by users trying to download products listed on its main trading venue and CBOE Futures Exchange at 8:18 a.m. New York time.

Delay Plans

The exchange initially planned to start trading at 10:15 a.m., 45 minutes after it normally begins, and delayed that by five minutes. At 10:21 a.m. it canceled that plan.

The delay prompted investors to seek hedging in other products, such as options on the SPDR S&P 500 ETF Trust, according to Jeremy Wien, head of VIX trading at JPMorgan Chase & Co. in New York.

About 1.9 million options contracts on the ETF changed hands in the half-day’s worth of trading before CBOE reopened at 1 p.m. New York time. That compared with a full-day average of 2.4 million this year, data compiled by Bloomberg show.

“There are other exchanges that have been open on normal hours, so I think it’s basically just been a re-routing of hedging to those exchanges,” Wien said in an interview.

 

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