NYSE reviewing upgrade as possible cause of options outage

Flooded Computers

The gathering occurred three weeks after Nasdaq’s computers were flooded with data from NYSE Arca, a competing exchange, revealing a bug in Nasdaq’s securities information processor that disabled systems that should have prevented the malfunction from snowballing.

Today’s error “was only a short outage,” Daniel Brady, president of San Francisco-based trading firm Entropy Capital LLC, said in a phone interview. “Not that significant,” he said. “I imagine this is just further fodder for the SEC and their review.”

“As is our practice, we have been monitoring developments and discussing them with market participants as appropriate,” said John Nester, an SEC spokesman.

The closure is another setback for American exchanges, which have faced criticism that the complexity of their electronic infrastructure makes them vulnerable to breakdowns. In addition to the Nasdaq halt on Aug. 22, options markets were roiled in August when Goldman Sachs Group Inc. bombarded exchanges with erroneous orders due to a computer malfunction.

CBOE’s Shutdown

In April, the Chicago Board Options Exchange was down for 3 1/2 hours because of a software error caused by preliminary work in preparation for a computer system reconfiguration. The outage prevented investors from trading options based on the VIX gauge of volatility and the Standard & Poor’s 500 Index, the most active in the U.S. which CBOE has exclusivity on.

According to OPRA’s website, each trade that is executed on an options exchange is reported to OPRA as a message, with quote message traffic representing the vast majority generated.

“Quotes are generated automatically for individual options series based on changes in the underlying stock price or index value,” it said. “In other words, every time a price changes for a particular equity security, the quotes for all of the options on that security or an index in which that security is represented are automatically updated on each exchange that trades those options.”

Regulators have tightened rules at exchanges to avoid market disruptions such as the May 2010 errors that briefly sent the Dow Jones Industrial Average down almost 1,000 points because of a faulty algorithm in what’s become known as the flash crash.

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