Data transmission was snarled in parts of the options market today as one of the biggest U.S. venues, International Securities Exchange LLC, reported issues disseminating prices while the industry’s benchmark gauge swung erratically three times.
Exchanges owned by Bats Global Markets Inc., NYSE Euronext and Nasdaq OMX Group Inc. briefly routed orders away from New York-based ISE. Molly McGregor, a spokeswoman for the company, said its two U.S. options venues remained open amid the issue sending information to the Options Price Reporting Authority. The Opra feed is the primary means of publicly distributing U.S. equity derivatives prices.
The malfunction at ISE, owned by Frankfurt-based Deutsche Boerse AG, follows a series of errors in American markets including Nasdaq OMX’s inability to distribute prices for its benchmark U.S. stock indexes for almost an hour yesterday, which prevented some options from trading. It occurred on the same day that charts of the Chicago Board Options Exchange Volatility Index showed the gauge known as the VIX surging and retreating in a matter of seconds three times.
“It’s frustrating that these market issues are happening so often lately,” Jon Cherry, senior vice president of derivatives trading at Chicago-based TJM Institutional Services LLC, said in an interview. “It’s across many exchanges and it’s in options and equities.”
Trading malfunctions have plagued the U.S. stock and options markets since the May 2010 plunge known as the flash crash. Nasdaq OMX halted trading for thousands of companies on Aug. 22 because of an error in the price feed it administers. Two days before that, Goldman Sachs Group Inc. bombarded options markets with unintended orders. On April 25, the CBOE opened for trading 3 1/2 hours late because of a software malfunction.
The errors could threaten industry credit ratings, according to Standard & Poor’s. U.S. Securities and Exchange Commission Chairman Mary Jo White ordered exchange owners on Sept. 12 to collaborate on preventing malfunctions.
The two U.S. options markets that ISE runs handled a combined 15% of the nation’s equity derivatives trading last month, according to data compiled by Options Clearing Corp.
Today’s spikes in the VIX could be unrelated to the malfunction at ISE. Another exchange owner, CBOE Holdings Inc., has exclusive rights to options on the Standard & Poor’s 500 Index. Contracts on that benchmark equity gauge determine the price of the VIX.
The VIX jumped to 21.26 from 13.94 at 10:02 a.m. New York time. The next price was 13.92. The 21.26 trade was later erased from the public record. At 11:22 a.m. New York time, the VIX posted another temporary spike: up to 15.27 from 14.16, and then immediately back down to 14.17, according to data compiled by Bloomberg. It happened again at 12:19 p.m. with a jump to 19.53 and retreat to 14.31, the data show.
“These moves in the VIX index can happen occasionally and they don’t affect the trading of the underlying options and futures and they don’t have a market impact,” Bill Speth, vice president of research at CBOE, said in a phone interview.
Later, CBOE said on its website that the unusual moves in the VIX were caused by a “software issue” that was resolved as of 1:21 p.m. New York time.
The SEC has questioned the quality of options market oversight, telling Chicago-based Options Clearing Corp. in September that it has “serious concern about systemic weaknesses in OCC’s risk management and operations,” according to a letter obtained by Bloomberg News. The clearinghouse guarantees all trades on U.S. options exchanges. The SEC also chastised the CBOE in June for a supervision breakdown that resulted in a $6 million fine.
The stock market saw its own disruption today. Nasdaq OMX said one of its two smaller exchanges is experienced a technical malfunction.
The Nasdaq BX exchange, which usually handles about 2% of U.S. equity volume, said it’s investigating “issues with a number of customer hosts,” according to a notice on its website. “The issue is affecting certain order entry, DROP and ITCH ports,” according to New York-based Nasdaq OMX, the second-largest owner of U.S. stock exchanges.
Trading continued, according to data compiled by Bloomberg, even though other exchanges including Nasdaq’s biggest market stopped sending orders there.