Veritas: Technology security becomes an issue for investors
Investors are starting to rethink their attitude to the middle and back office technology including the systems that support the trillions of financial deals done across the world daily.
In the last week alone, three technology “glitches” have jeopardised investments in markets that are already highly volatile and uncertain.
On Monday, Knight Capital, the largest US provider of retail market-making in New York Stock Exchange and Nasdaq-listed stocks, revealed it suffered near-fatal losses after a computer failure flooded the NYSE with unintended orders for dozens of stocks.
The effect was to ramp up some shares by more than 100%, but a $440m trading loss for the firm. It suffered further as clients deserted, causing volumes to drop, and the share price plummeted by 80%.
On Tuesday, trading on Spain’s blue-chip IBEX 35 was shut for five hours after a “technical glitch”. The market bounced on re-opening but the exact fault was not identified, adding to investors’ already heightened concerns about liquidity and the weakening economy.
The next to be hit was Tokyo’s Stock Exchange Group, which halted trading of Topix index futures, Japanese government bond futures and options trading for about 95 minutes, the second shutdown in seven months. The exchange suffered its biggest disruption in six years on February 2, when trading was halted for 3½ hours.
“This shouldn’t be happening, and it’s a risk for investors that they can’t trade when they want to,” said Kazuyuki Terao, chief investment officer of RCM Japan Co. RCM oversees about $153 billion globally. “A system error happened earlier as well, and I have to have reservations about what’s going on,” he told Bloomberg.
“The failure of Topix futures reduced the number of people doing index arbitrage,” Naohide Une, head of equity derivatives trading at Goldman Sachs Japan Co, told Bloomberg. “That’s why the system error is not only affecting futures, but making cash-equity trading thinner. I thought lower volume could cause unusually big moves in stocks, but what actually happened was market participants were holding back trading.”