Computer technology has revolutionised the trading of stocks - making the process faster, more efficient and cheaper.
But the changes have come at a cost: It used to take an event as calamitous as a war to close a stock exchange, but now all it takes is a technical glitch to shut down trading.
At the Singapore Exchange (SGX), three major disruptions to trading have been seen in the past two years. The latest, on July 14, halted trading for over five hours and caused the market to be shut down for the rest of the day.
Considering that the SGX is the public face of Singapore's financial centre and the primary stock exchange here where Singapore-listed shares are traded, the worry is that if trading glitches continue to occur, investors' confidence will be affected and some may choose to take their money elsewhere.
Each time there is a trading glitch, we get howls of fury from angry traders over lost profit opportunities or, worse, financial losses because of the stoppage. It is a serious issue because about $1 billion worth of shares changes hands daily and investors rely on traded stock prices to give them a value of the shares which they own.
But few of us understand the technical issues involved.
To its credit, the SGX has taken the matter seriously and has established a Securities Industry Working Group (IWG) to look into ways to improve its operational resiliency to ensure that if and when a glitch does occur again, the bourse operator can respond in a timely, effective manner to minimise disruption.
What deserves highlighting is that this working group includes not just representatives of the SGX but also members of the investment community, independent experts and software vendors.
This is a big departure from the previous stance it had adopted in 2014 when it established a four-member committee, made up of only its board directors, to look into an earlier breakdown in trading after a bolt of lightning, which lasted barely 0.1 second, shut down both its securities and derivatives trading systems.
Having people outside of the SGX to take a look may throw up fresh perspectives on how to resolve the challenges besetting the bourse operator.
The IWG has its work cut out.
Its brief includes reviewing the SGX's provisions for backup systems and processes, its ability to reconnect with brokerages after a glitch, the processes to enable trading to resume promptly when a disruption occurs, as well as industry-wide exercises to test the readiness of the SGX and brokerages to respond to technical glitches.
One big problem plaguing stock exchanges across the globe is the extremely complex trading systems they now operate in order to trade and process millions of transactions daily. This can amplify the impact of technical glitches when they erupt.
Another problem is the sophisticated defences stock exchanges deploy to protect themselves against hacker attacks. This also makes them more vulnerable to breakdowns since they add to the complexities of the trading system.
Each trading glitch can be very different in nature. But research has shown that when investigations are established to examine the reasons for the disruption, they tend to focus on what has caused the latest fault.
How these glitches reverberate through the broader trading system is also little studied or understood.
Consequently, merely combing through all the processes to find the cause of the latest glitch may be insufficient to prevent future disruptions. Take the Nov 15, 2014 lightning bolt shutdown.
This occurred even though the SGX had installed four layers of protection against power supply disruptions.
Stock trading was disrupted again the following month due to a software upgrade on an unrelated part of its IT infrastructure which caused the "client accounting system" used to generate client reports for local brokerages to malfunction.
The July 14 breakdown this year that resulted in the bourse's longest trading halt was due to a faulty disk running programs which generate trade confirmation messages.
The problem was compounded by the failure of software to detect the problem and activate a switch to a secondary data centre.
As a result, traders got duplicate messages on trades which were done. That, in turn, complicated the recovery process, given the need to reconcile the order book and trades done, and prolonged the trading halt.
So far, however, brokers have tended to take the trading disruptions in their stride.
But some of them have expressed concern about the possibility of more trading glitches as the SGX presses ahead with a new Post-Trade system in its efforts to overhaul its clearing, settlement and depository services.
That revamp is also supposed to allow an investor to "pledge" his shares for the 5 per cent collateral required in order to trade without having them transferred out of his Central Depository account when collateralised trading is implemented eventually.
This is no idle concern. In 2009, the SGX had to delay the roll-out of a settlement system whose objective was to shorten the cut-off time for stock delivery by a few hours, following a systems glitch.
There is no telling the sort of teething problems that may crop up as the SGX implements its new Post-Trade system.
Seen in this context, one pertinent question to ask is whether the brief of the IWG should be broadened even though it already has many issues at hand to deal with.
Given the important role which the SGX plays in the financial market, each trading glitch deserves to be taken as seriously as an air disaster where human lives are lost - even though, of course, the consequences are not quite as grave.
Hence, any inquiry into what causes a disruption should look, as widely as possible, at what has gone wrong in order to minimise the possibility of future glitches.
After all, there is no telling when the next technical glitch may erupt, given the growing complexity of the SGX's trading system.
This article was first published on September 19, 2016.
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