See things clearly

Technology and trust in the financial markets

I used to think that we were good at designing systems.  We would phase test them, user test them, stress test them and more, and eventually we would roll out the system and it would work.  And life was good.

In his blog, “Bank systems are not safe (anymore)”, Chris Skinner reflects on the reliability of financial systems,

“...It used to be the odd outage, but most banks and exchanges reported 99.99999999999% uptime and, if they had that 0.00000000001% downtime, it was so minimal as not to be noticed...”

But in recent years, he notes, there has been an increase in complexity,

“...we started getting into a new world of developments where systems relied on networks, networks relied on servers, servers relied on mirroring, mirroring relied on programs and programs relied on programmers...


interlinkage and interdependcies became more and more complex and clouded, rather than simpler and easier, and the systems started to fail.  And life was bad...”

During the last few weeks life hasn’t been great for some of the people involved in a few of the main financial markets.

Key financial entities in China, the U.S. and Germany have been hit by technical problems:

Everbright Securities - A computer glitch led to over 3.4 billion Yuan of ‘buy’ orders being made by mistake, which resulted in regulators banning the Shanghai company from proprietary trading for 3 months.  After an 18% fall in the company’s share price, the president resigned. 

Goldman Sachs - Lost tens of millions of dollars after a computer glitch led to a flood of erroneous options trades being made ‘vastly out of line with market prices’. Subsequently, the company placed four technology specialists on administrative leave.

Nasdaq –Trading of Nasdaq-listed stocks was paralysed for three hours on all U.S. markets because of connectivity problems between the New York Stock Exchange’s fully electronic stock market (Arca), and the Nasdaq-operated Securities Information Processor (SIP).

Eurex – In Frankfurt, derivatives trading was suspended for an hour, “in order to protect the integrity of the market”.  The fault was caused by, “an incorrect time synchronization within the system” running on the exchange’s new trading architecture.

As we’ve warned here before, without change in the ways that financial markets operate these types of serious technological outages will undoubtedly continue to happen.

Siren voices are growing louder, warning of the serious risks posed by increasing complexity and insufficient resilience in the financial system:

Sal Arnuk & Joseph Saluzzi – The authors of ‘Broken Markets’ note that, “...One of the main reasons for the complexity is the number of exchanges...fragmentation of the equity market has created an enormous technical strain...exchanges failed to spend enough money on the infrastructure that links them all together...”

Eric Hunsader – Owner of Nanex, a financial data technology company, warns “...when you have these complex systems interacting with each other... you set yourself up for times of market stress...you’re only going find out how the new systems all work together when you’ve got this really bad news event that nobody was expecting...”

RT Leuchtkafer – A private investor, relates that a branch of the U.S. Federal Reserve interviewed, “...a number of trading companies about technology controls and experiences. Six out of nine reported that their own computer algorithms had gone haywire or that they had been snared in someone else’s misbehaving technology...”

The numerous technical ‘glitches’ of the past few years have shaken confidence, Leuchtkafer notes,

“...A survey by Tabb Group in 2010 found only 15 per cent of survey respondents had weak or very weak confidence in the market. That had risen to 39 per cent this year...”

To maintain confidence in the markets, finance needs to create more clarity on how the financial system operates.

Markets rely on flows of data to do business, so it is critical that stakeholders have a clear understanding how data flows through the “interlinkage[s] and interdependcies” of the global financial system.

If these stakeholders – regulators, financial institutions, technologists, traders – can remove ambiguity they will be able to communicate more clearly and make the best-informed decisions about operations, risk, governance and other key business drivers.

Over time this will help rebuild trust in the resilience of the financial system and in the markets as a whole.

It’s a mantra worth repeating:

clarity > understanding > communication > trust

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