Another day, another exchange glitch.  This time the problem was in the options market at the Options Price Reporting Authority (OPRA).  OPRA, if you not familiar with it, is very similar to the SIP in the equities market.  According to its website :

“OPRA is the securities information processor for market information generated by trading of securities options in the United States. Last sale reports and quotations are the core of the information that OPRA disseminates.”

Similar to the equity market, the options market has a number of “participant exchanges” that oversee the policies and procedures of the OPRA plan.  Current OPRA participants include: AMEX, ARCA, BATS, BX, BSE, C2, CBOE, ISE, MIAX, NASDAQ, and PHLX.  While NASDAQ is the processor for NASDAQ listed equities, the processor for the options market is SIAC (which is owned by NYSE Technologies ).

While we are still waiting for the official post mortem from NYSE, the problem in the options market yesterday seemed very similar to the NASDAQ SIP problem from August 22^nd – the consolidator of the multiple exchanges was overwhelmed and crashed.

Ironically, this latest glitch happened less than a week after SEC Chair Mary Jo White called all the exchange leaders in for a meeting.  Chair White put herself on the line with this statement about the meeting:

“Our securities markets are strong and work effectively for millions of investors and businesses.  The orderly functioning of those markets and the robustness of our market infrastructure are vitally important to our nation’s economy.  That is why we hold ourselves to very high standards.”

Unfortunately, for all investors, the exchanges have once again failed to uphold these high standards and continue to embarrass themselves and our regulators.   According to the WSJ, “NYSE said OPRA was hit by a “quote processing problem” that forced a halt to trading and took 10 minutes to resolve. The issue was traced to a routine upgrade.”  We expected that the exchanges would say that this was just an isolated incident and that it has been fixed.  We will likely be told that markets worked efficiently and nobody got hurt.  But each time there is a glitch, more confidence gets eroded and more investors question the system.

Chair White outlined some concrete steps that the exchanges needed to take after her meeting last week including:

– Provide comprehensive action plans that address the standards necessary to establish highly resilient and robust systems for the securities information processors (SIPs), including testing standards and disclosure protocols. 

– Identify and provide assessments of the robustness and resilience of other critical infrastructure systems. 

– Provide SIP plan and/or rule amendments addressing the issuance, effectiveness, and communication of regulatory halts.

While these are all good steps, what really needs to be done is for the SEC to address the root cause of the problem. They need to address why the market has become overly complex and filled with exchange conflicts of interests. They won’t have to look far since many of today’s problems were rooted in regulations that were designed by the SEC (with the help of industry participants) about a decade ago.

Our markets today are all interconnected – when one market sneezes, many others catch a cold.  So far, we have been lucky that these “SIP glitches” have been fairly isolated but we may not be that lucky in the future if these glitches continue.