Global Technology focused Trading Firm Optiver Shares Recommendations on how to Address Platform Outages

The team at Optiver, a global tech-focused trading firm that’s dedicated to enhancing the market, says that they realize or are aware that achieving “true resilience” across European equity markets can be a large and “multifaceted” challenge which may not be properly addressed with “a single action or a simple solution.”

According to Optiver, given all the different “execution venues” in Europe, they think that it’s not acceptable to have no legitimate alternatives if the main exchange happens to have a technical problem. The Optiver team thinks that the fundamental market model can change or adapt, along with better communication and “removal of regulatory hurdles” so that other options become available.

The company adds:

“Optiver also believes there are some clear and immediate improvements to be made by exchanges when communicating during and after an outage, as well as by regulators to ensure that no structural issues remain that the industry cannot innovate around. We believe that these improvements will make trading in European equity and related markets safer and more efficient. It will also make markets more resilient to outages, preserving flexibility for participants to make their own execution judgement based on their own individual goals and factors.”

It’s worth noting that exchange platform outages have become fairly common. Digital investment platform Robinhood was reportedly being investigated by US regulators over issues related to platform outages (along with other questionable practices such as trading restrictions, and their options trading policies).

Optiver suggests that the following needs to taken into consideration when building more resilience into European equity markets:

  • Implementation of “minimum standards for communication by trading venues during and after outages to ensure all stakeholders have accurate and timely information.”
  • Targeted regulatory intervention “aimed at ensuring certain critical functions like the closing settlement auction and post trade processes proceed smoothly despite outages as well as removing hurdles for trading to continue on alternative venues.”
  • New market models “developed by exchanges working with their members and stakeholders to provide for a safe and orderly continuity of trading during outages by major venues.”

Optiver clarifies that it realizes that achieving “true” resilience across the European equity markets is a significant challenge that can’t simply be addressed with a single or one-size-fits-all solution.

But they do think that there are certain improvements that can be made by exchanges while they communicate during and after outages. There also needs to be productive dialogue with  regulatory authorities in order to ensure that “no structural issues remain that the industry cannot innovate around.”

Optiver added that they’re calling on industry bodies that represent trading platforms, buy-side, brokers, and market makers to work cooperatively to establish “clear minimum communication standards that stakeholders can rely upon and guide regulators in implementing narrow, targeted reforms.”

Optiver has made some recommendations:

  • Upon “the announcement of an outage by a primary market, secondary markets would enter a short freeze period, similar to a circuit breaker, after which they could reopen for trading by holding a re-opening auction.”
  • Trading would “take place using relatively tight price collars/circuit breakers as we would expect liquidity to be thinner than normal. For instance, where circuit breakers may normally trigger after a move of 5%, in an outage trading model a 1% trigger could apply.”
  • Similarly, max order size restrictions “should be automatically lowered to reflect the expected lower level of liquidity.”
  • A relatively “limited set of more basic order types would be allowed.” Market orders should be “carefully considered and potentially disallowed.”
  • Due to these extra protections, “a relatively higher share of orders may be rejected, or cause the protections to trigger.” That should be “considered a desired feature of the market in this state; we are aiming to keep trading in a safe, conservative manner.”
  • In general, auctions are “considered to be positive for bringing liquidity together; this is why scheduled auctions are often used to set official settlement prices, circuit breakers use an auction to bring liquidity together prior to reopening, and markets for illiquid instruments sometimes have an auction-only model.”
  • On the flip-side, auctions that “are too short in duration do not allow for sufficient participation to bolster liquidity.” In this vein, “during an outage, a frequent batch auction could be a more suitable primary matching model, provided the duration of the FBAs is long enough; for instance, moving to a duration measured in seconds instead of milliseconds.”

(Note: for more on these suggestions and issues from Optiver, check here.)

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