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Ain't life a glitch?

Published in Automated Trader Magazine Issue 31 Q4 2013

Automated Trader investigates the various responses, both from the industry and regulators, to a spate of technological mishaps. Adam Cox reports.

The word seemed to take hold in the 1950s, during what was then known as the space race. Some say it came from the German glitschen ("slip" or "slither"). Others contend it stems from the Yiddish gletshn ("slide" or "skid"). Still others say the real origin is unknown.

Whatever the etymology, the word "glitch" is used an awful lot these days - at least in the world of financial trading. A search on Google Trends shows that "market glitch" as a search term spiked higher in May 2010 (no prizes for guessing what caused that), and since then has been a fairly common search, with the occasional mini-spike such as after the Knight Capital meltdown in August 2012 and the NASDAQ disaster a year later. Prior to 2009, the term barely registered in the Google Trend metrics.

The NASDAQ debacle - which knocked out the exchange for three hours - represented the biggest exchange glitch in modern history, but it was by no means the only one. In recent months, a number of major exchanges have experienced one kind of glitch or another which halted trading. Some were small, like the one which hit Eurex. Others were more severe, like the NASDAQ affair, which caused some 2,700 securities to stop trading. Taken together, they've dented investor confidence and raised concern among regulators.

Mack Gill

Mack Gill, MillenniumIT

"If anything, I feel that the bar has been raised for everybody on testing - whether you're a technology provider or an exchange or trading venue - and just ensuring visibility of that as an operator."

But what can be done? Does the solution lie in better technology or is it a question of better crisis management and communication? Whenever mishaps happen, everybody talks about "lessons to be learned", but there is plenty of debate about what those lessons really are. And should regulators act as taskmasters, forcing the issue through? So far, regulators have trod a fine line. They've convened forums, both after Knight and after NASDAQ. And they've even made demands (such as the Securities and Exchange Commission's order to exchange heads discussed below). But as yet there has been little talk of regulators taking on a more activist role in defining standards for exchange system technology - a point many market participants no doubt welcome.

If there is one thing that seems certain, it's that there will be more problems.

"As sure as computers and programs have had technical glitches in the past, I believe there will be glitches in the future," said Commodity Futures Trading Commission (CFTC) Chairman Gary Gensler addressing a recent meeting of the CFTC's Technology Advisory Committee. "That's just the nature of the reality we're in, and thus, I think we have to look to risk controls and system safeguards to protect markets when such glitches inevitably occur again."

Mack Gill, the new chief executive at exchange technology group MillenniumIT, agrees that the heat is definitely on. "If anything, I feel that the bar has been raised for everybody on testing - whether you're a technology provider or an exchange or trading venue - and just ensuring visibility of that as an operator," Gill told Automated Trader.

But before launching into a gripe-fest about all the woes on exchanges of late, it may be worth putting things in historical perspective.

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