Options market hit with data disruption as VIX lurches

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.”

Flash Crash

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.

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