NYSE Glitch -2015-0717-2

What Glitch? Market Structure Confidence Highest Since Before Flash Crash

Sayena Mostowfi / Valerie Bogard | July 2015 | www.tabbgroup.com

2015 The TABB Group, LLC. All Rights Reserved.

May not be reproduced by any means without express permission.

The TABB NYSE System Glitch Survey Results

2015 The TABB Group, LLC. All Rights Reserved. May not be reproduced by any means without express permission.

Asset Manager / Hedge Fund, 27%

Broker Dealer - Agency Broker, 18%

Vendor, 12%

Consultant, 11%

Execution Venue / Clearinghouse, 11%

Broker Dealer - Market Maker with

Customer Flow, 9%

Broker Dealer - Proprietary Trading

Firm Only, 5%

Academia, 2% Media, 2% Regulator /

Legislator, 2%

Respondents Demographics

There were 266 respondents to the TABB NYSE System Glitch Survey, 27% consisted

of Buy-Side Firms and 32% Broker Dealers.


19%

17%

20%

9%

4%

2%

5%

12%

45%

38%

36%

27%

26%

32%

31%

41%

18%

28%

26%

35%

30%

32%

33%

32%

13%

10%

11%

18%

28%

26%

24%

12%

5%

5%

7%

11%

12%

8%

7%

3%

NYSE trading glitch - July 2015

Grand Bargain - Feb 2015

Chair White speech - June 2014

Release of Flash Boys - March 2014

Hash Crash - April 2013

Knight trading error - August 2012

Facebook IPO glitch - June 2012

Flash Crash - May 2010

Very High High Neutral Weak Very Weak

The confidence in the US Equity Market Structure is at a 5-year high with 64% of the

respondents having High/Very High confidence and 18% Neutral.

Question #1: Please rank your confidence in the US Equity Market Structure.

2


31%

9%

29%

15%

19%

23%

20%

10%

32%

17%

46%

64%

43%

51%

45%

40%

40%

48%

20%

50%

33%

15%

18%

21%

18%

21%

0%

10%

24%

33%

50%

8%

9%

11%

8%

13%

15%

20%

24%

20%

17%

15%

3%

5%

5%

2%

20%

7%

4%

Broker Dealer - Proprietary Trading Firm Only (13)

Vendor (33)

Execution Venue / Clearinghouse (28)

Asset Manager / Hedge Fund (73)

Total (266)

Broker Dealer - Agency Broker (48)

Regulator / Legislator (5)

Consultant (29)

Broker Dealer - Market Maker with Customer Flow (25)

Academia (6)

Media (6)

Very High High Neutral Weak Very Weak

The least negative (Weak/Very Weak) respondents were Execution Venue/Clearing

House (11%) followed by Vendors (12%) and Asset Manager/Hedge Funds (13%).

Question #1: Please rank your confidence in the US Equity Market Structure.

3


4%

1%

4%

18%

17%

15%

10%

7%

3%

57%

69%

85%

72%

75%

79%

76%

67%

80%

80%

85%

18%

15%

17%

15%

17%

18%

17%

20%

15%

4%

2%

3%

17%

20%




Consultant (29)

Total (264)


Vendor (33)

Media (6)

Academia (5)



Very Positive Positive No Impact Negative Very Negative

Over three-quarters of the respondents were not negatively impacted by the NYSE

system glitch.

Question #2: What impact, if any, did the July 8th NYSE glitch have on your business?

4


Institutional firms (37%) and broker dealers with customer flow (25% of market makers

with customer flow and 42% agency B/D) are revisiting closing auction procedures.

67%

42%

27%

25%

24%

15%

15%

13%

25%

42%

25%

16%

37%

15%

48%

25%

20%

33%

33%

31%

50%

60%

48%

69%

39%

75%

80%




Vendor (24)




Consultant (23)

Academia (4)

Media (5)

Question #3: Has your firm tested procedures for changing the source from the primary closing auction to an alternative mid-day?

5

22%

32%

46%

Yes, it is fully tested

Considering the events of yesterday, wewill be revisiting the issue

No, it is not necessary

Total: 237


If the primary was unable to conduct a closing auction, over 60% of non agency broker dealers and buy side firms would utilize last print from consolidated tape or closing price

designated by the primary.

58%

39%

36%

31%

15%

25%

23%

24%

13%

31%

13%

8%

8%

1%

8%

2%

8%

6%

4%

11%

4%

17%

19%

20%

42%

35%






Question #4: If the NYSE -- or any primary listing exchange -- were unable to conduct a closing auction, how would you have marked your books/portfolios/positions?

6

32%

22% 9%

4%

6%

27%

Last print from consolidated tape

The closing price designated by the primary

Last print from exchange w/ largest market share

The final 1 minute VWAP

Weighted average of all the closing prints

Not sure

Total: 240

50%

36%

20%

16%

20%

28%

40%

4%

24%

20%

20%

8%

20%

8%

8%

50%

32%

60%

16%

20%


Vendor (25)

Academia (5)

Consultant (25)

Media (5)


Market practitioners are more skeptical about whether Reg SCI will prevent future

system glitches.

80%

50%

40%

21%

16%

15%

15%

13%

12%

11%

20%

28%

25%

31%

41%

46%

40%

32%

20%

50%

40%

45%

47%

46%

41%

31%

40%

54%

7%

13%

8%

4%

10%

8%

3%

Media (5)

Academia (6)


Consultant (29)

Vendor (32)






Question #5: How will Reg SCI impact future system glitches?

7

16%

33%

44%

6% Reduce the number of market glitches

No difference before / after

I do not know

Hinder resolving market glitches

Total: 262


38%

21%

15%

12%

8%

7%

24%

30%

19%

22%

10%

5%

19%

20%

20%

23%

15%

7%

12%

14%

20%

26%

20%

4%

5%

11%

20%

15%

37%

5%

2%

3%

7%

2%

10%

73%

Staying abreast of new and upcomingregulations

Responding to regulatory inquiries

Having a consolidated view of tradingactivities and risk exposure

Monitoring client, regulatory, and firm-based restrictions

Getting timely notification andmanagement of trade violations

Not listed as an option

Most Challenging 1 2 3 4 5 6 Least Challenging

Over half of the respondents ranked staying abreast of upcoming regulations and

responding to regulatory inquiries as the biggest compliance challenges.

Question #6: Please rank the following compliance challenges (1 = most challenging, 6 = least challenging).

8

Note: Some percentages do not add up to 100 due to decimal rounding.


Additional Respondent Comments

9

As long as the SIP is available any market center or trading venue outage is pretty much a non-event. Markets operated around the problem. One of the un-intended consequences of Reg NMS fragmentation. Small [impact], had to switch risk system to composite from primary. Easy. With high tech, glitches should be expected from time to time. Software engineering is still an art,

regardless of technological advances

If NYSE fails mid day it is not a big deal. If they do not open it is a big deal for retail as wholesale markets makers will not all use the same process causing confusion among retail investors. If NYSE does not

have a closing cross it causes confusion for institutional flows.

For me as an enterprise architect it highlights planning issues.

NYSE has contingency plan in place for this - based on consolidated trading. Clients are able to choose a fallback strategy in case official closing price is unavailable. We maintain multiple closing prices, including Primary Market close, Consolidate close, and allow the

broker to choose the valuation strategy per instrument (or default for all per exchange).

I suspect the costs will heavily outweigh any benefits. It's not the silver bullet. It may stifle creativity because it will slow the introduction of new features and

functions.

Hard to say. The extra overhead will actually mean fewer changes and a harder time responding to old but untriggered bugs. That said, the potential fines will force firms to be more diligent.

There's no evidence to suggest the requirements of Reg SCI will reduce glitches from occurring. It will assist in evidencing testing of systems and functionality, but again, doesn't provide any assurance that

systems glitches or failures won't occur. Inherently, technology (hardware and software) can fail regardless

of any rule that requires testing.

If sufficient and effective monitoring, along with fundamental modernization, glitches will be reduced. Adding prescriptive and rigid processes to software development and operations doesn't make for more

reliable systems. The focus of Reg SCI should be to address single points of failure in the market (i.e.

SIP, opening/closing auctions, IPO's) by creating viable alternatives and procedures.

NYSE

Glitch

Impact

Closing

Auction

Reg SCI

Impact

NYSE Glitch -2015-0717-2

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