FSA: If LSE Goes Down, Dark Pools Should Suspend Trading
September 9, 2010
The Financial Services Authority has recommended that dark pools operated by multilateral trading facilities, such as Chi-X Europe, suspend trading activity if another outage hits the United Kingdom’s primary venue, the London Stock Exchange.
The recommendation is part of a package of guidelines released this week by the FSA on actions trading venues should take in the event of an unexpected outage. The comprehensive set of steps are being welcomed by United Kingdom broker-dealers.
The London Stock Exchange experienced a seven-hour outage in September 2008, a one-hour outage on October 14, 2009, a partial outage on November 9, 2009, and a complete outage on November 26, 2009.
In the latest issue of MarketWatch, the FSA’s publication on market conduct and transaction reporting issues, the FSA recommended that dark pools run by multilateral trading facilities, such as Chi-X Europe’s Chi-Delta, NYSE Euronext-owned SmartPool and BATS Europe's Dark Pool, suspend trading activity in the event that a reference price from the primary exchange is unavailable.
"In the event that the specified reference price becomes unavailable, trading on reference price sysems would need to be suspended until a reliable reference price has been re-established," wrote the FSA.
That means that when a reference price is available on another trading venue, trading doesn't have to be suspended. The suspension would only occur when an MTF uses a reference price from a listed exchange for its dark pool.
In fact, in the event of an outage on a listing exchange such as the LSE, trading on MTFs operating lit liquidity pools -- as is also the case with Chi-X Europe and BATS Europe -- would be ideal because they display reference prices. "It may be desireable for trading firms to have connectivity to multiple venues to ensure business continuity in the event of an outage on any individual trading venue," wrote the FSA.
For broker-operated dark pools, which also rely on reference prices, the paper suggests they should “have appropriate arrangements in place to ensure they continue to meet best execution obligations."
"The FSA is taking a step in the right direction,” says Richard Balarkas, chief executive of Instinet Europe. “On previous occasions some exchanges have handled major outages with little regard for the financial impact they were having on trading participants.''
The regulator also said in MarketWatch that trading venues experiencing a power outage should communicate with the wider market -- member firms and other trading venues – in a way that is readily available and not misleading. “Good practice suggests that updates be provided at least every 30 minutes and whenever the venue operator changes the mode/status of its market or a restart has been scheduled,” wrote the FSA. it added that those trading venues should set transparent limits – such as a minimum number of member reconnections or a specific level of trading volume – when deciding when to restart a market.
Among the problems brokers may face says Balarkas: they may not know if orders placed at the exchange before an outage have been filled or not. As a result, brokers may feel obligated to tell their fund manager clients to trade elsewhere only to discover a few hours later that some orders had been filled which the broker-dealer is then obligated to settle.
