It was the crisis that never happened. On Wednesday a technology glitch meant that the New York Stock Exchange (NYSE) went down for four hours. The news quickly flashed around the world, and even the President was briefed on the matter.
And yet, when the dust had settled, it had remarkably little impact.
The situation would be very different were the same thing to happen in London again, as it last did back in 2011.
As Dave Nadig, director of exchange-traded funds at FactSet Research Systems, told Reuters: “If this happened at [the London Stock Exchange], you would just be sitting staring at a blank screen.”
Mr Nadig explained that the outage was “one of the rare cases where the fragmented markets we live in actually serve a purpose”.
In other words, what kept the wheels of Wall Street turning was the fact that while the NYSE is a brand that is synonymous with American capitalism, it has a market share of only around 18 per cent of equity trading volumes.
This meant that while the outage was inconvenient, and highly embarrassing for the NYSE, Wall Street traders were able to switch their business to any one of a plethora of competing exchanges.
NYSE-listed stocks can be traded on exchanges operated by, for example, the Nasdaq OMX Group or BATS, not to mention the more than 40 private share-trading venues.
That is not the case in London. That last London Stock Exchange outage in 2011 occurred when a new trading system it had recently launched broke down. Share trading was suspended from the opening bell to 12.15 as a result, an outage of just over four hours.
While their peers in New York kept busy making money earlier this week, its own traders were largely left twiddling their thumbs four years ago.
The same occurred two years before that, when there were two outages during a two-week period in November, causing frustration and annoyance across the City.
While the London exchange’s technology has proved more reliable than some, there’s little doubt that another outage will occur sooner or later and traders will be left to stew in their juices again.
In part this is because the London Stock Exchange is still the dominant player in its home market, with a share of about 60 per cent of trading volumes. As such, it is used for reference pricing even when traders use other facilities, such as the European operation BATS Chi-X.
Another key difference between markets in London and those in New York is that in the latter there is what is known as a “consolidated tape” – a single data feed showing the prices of, for example, all the stocks listed on the NYSE, and taking data from all participants. It is provided as a utility. So if the NYSE goes down, it causes far less of a problem than might be the case in London.
Rhodri Preece, head of capital markets policy at the CFA Institute, a global association of investment professionals, said such a facility wouldn’t solve all the problems in London, or in Europe, where national exchanges still dominate in their respective countries. And you couldn’t, for example, easily trade Sainsbury’s in Paris if London went down, because the concept of pan-European trading doesn’t exist. But it would help.
“It is important that investors have easy access to real-time market prices via a consolidated tape so that markets can be virtually linked. This is a key difference between the US and European stock markets; absent this linking mechanism, it can be difficult for investors without direct feeds to gauge the true state of the markets, especially in volatile times,” he said.
Now, of course, is a particularly volatile time, given events in Greece. Not to mention those in China, where recent sharp falls in share prices have been watched with mounting concern by traders.
For their part, the regulators are acting. The Prudential Regulation Authority oversees LCH.Clearnet – which clears trades across the London Exchange, along with numerous other parts of the City’s financial infrastructure – and has put a high priority on improving technological resilience and the ability to cope with threats such as a cyber attack.
David Buik, market commentator for the broker Panmure Gordon, was calling for back-up systems to be installed to deal with outages as far back as 2001, when he had a rather frank conversation with Sir Brian Williamson, then boss of the London Futures Exchange (Liffe), in the wake of a notorious outage at the exchange. Mr Buik pointed out that, in many respects, European exchanges have been ahead of the curve when it comes to technology. Trading floors, for example, are a distant memory, while the NYSE still has one.
But Mr Buik added: “The London Stock Exchange is responsible for 60 per cent of turnover, so the importance of an orderly exchange is a paramount. In London we are blessed that the likes of BATS and the newcomer Aquis have extremely reliable technology. As for Euronext and Deutsche Börse, the same importance to reliability is attached.
“We live in troubled, turbulent and volatile times, so we must more than hope that equity markets in Europe are in very safe hands. Last Wednesday’s machination was a timely wake-up call.”
The London Stock Exchange declined to comment for this article.
However, Alistair McCaig, market strategist at IG, the financial spread-betting company, was more sanguine about the impact of an outage. He said what is most important is that there are facilities in place to deal with such an event, and allow trading to resume without unnecessary ructions when the problems have been dealt with.
He added: “I think there are enough procedures in place to handle an outage on a short term basis. The markets have got procedures in place, for example, for putting equities into auctions when trading restarts. The big issue for market participants would be for there to be an orderly reintroduction of trading should it happen. The key word here being orderly.”