Sandy exposes financial systems weaknesses in New York
The decision by NYSE and CME to shut down in the wake of Hurricane Sandy has raised questions over the resilience of financial systems.
Nobody doubts the link between superstorm Sandy and the shutdown of NYSE Euronext’s operations, as well as the stopping of futures trading on the CME. What must be of concern is that, despite commitments in developing back-up and increasing use of fail-safe devices in the wake of events such as 9/11, the world’s financial system faced a shock brought about by a combination of wind and water.
For fund selectors, the issue may be what this suggests about funds designed to track the performance of indices, or indeed funds traded on exchanges that are meant to provide additional daily liquidity as part of their unique selling point.
Lower cost is cited as another reason for ETFs and ETCs becoming increasingly used for matters such as tactical allocation. But these benefits become irrelevant if markets are shut down due to weather conditions.
There were two key areas of hardware that Sandy threatened. The first was data centres located in lower lying areas of New York. Certain servers buried below street level were hit by flooding, while others were forced to switch to backup power supplies when the broader electricity grid went down. But these backup supplies were not always enough.
The other main area of threat was to the landing sites of sub-sea cables, which account for the bulk of global data traffic between continents and financial centres such as New York and London. A number of key landing points were near some of the coastal areas worst hit by Sandy.
|Sub-sea cable landing sites||Cables|
Tuckerton, New Jersey
GlobeNet Segment 5 (Bermuda-U.S.)
|Manasquan, New Jersey|
Canada-United States 1 (CANUS 1)
|Wall Township, New Jersey||Tata TGN-Atlantic|
|New York, New York||Seabras-1|
|Island Park, New York )||FLAG Atlantic-1 (FA-1|
|Bellport, New York||Yellow/Atlantic Crossing-2 (AC-2)|
|Brookhaven, New York|
Atlantic Crossing-1 (AC-1)
Mid-Atlantic Crossing (MAC)
|Shirley, New York|
|Northport, New York||FLAG Atlantic-1 (FA-1)|
Software seems to have coped well (see further comments below). But the human element seems to have been crucial in the decision whether or not to maintain trading in markets.
On 28 October, the day before Sandy truly hit New York, the CME Group announced: “New York City has issued a mandatory evacuation of Zone A, which includes CME Group’s NYMEX world headquarters and New York trading floor.
“We will open all of our electronic markets at their regularly scheduled times on CME Globex and CME ClearPort, our online electronic platforms.”
Unfortunately, the CME’s faith in its ability to keep its electronic platforms going was misplaced, as in the wake of Sandy it was forced to close its interest rate, treasury, eurodollar and Fed Funds business, “in line with SIFMA’s decision to close the cash market”. SIFMA is the Securities Industry and Financial Markets Association, which represents asset managers, banks and securities companies in the US.
NYSE Euronext said when it finally did re-open for business on Wednesday 31 October that “our building and systems were not damaged.” This in turn raises questions about why it shut down in the first instance, given its ongoing commitment to meet growing demand for automated trading.
Software in the spotlight
Events such as superstorm Sandy “will bring pure cloud vendors into the spotlight,” says Neil Smyth, marketing and technology director at portfolio analysis tool provider StatPro. While there were no problems noted with online delivery of its services, Smyth says the examples of outages, particularly involving stock markets, have highlighted the costs that need to be accepted in order to ensure continuity of services.
Smyth expects there will be more questions asked about systems resiliency and the cloud. “Any outage always brings into focus the services you provide,” he says. “It makes people a bit more fine tuned to the questions that may come through the RFPs, or the security and resilience questionnaires. Obviously it is part of due diligence.”
For Neil Smyth’s full response to Sandy, visit: http://invmt.eu/RFslbC