Death, taxes and technology risk

Exchanges must plan for the certainty that their technology will fail, sometimes

Benjamin Franklin – one of the founding fathers of the United States – is widely credited with saying that there are only two certainties in life: death and taxes. To this a third can perhaps now be added: technology failures.

Breakdowns in technology infrastructure are going to happen from time to time. They simply cannot be avoided. Even worse, just because you’ve fixed today’s glitch in your technology infrastructure doesn’t mean you’ve prevented others from emerging in a whole other guise.

The repercussions can be serious enough when technology falls over within a bank or other financial institution. The consequences can be even more far-reaching when the very infrastructure underpinning financial markets is threatened by systems failures.

This is starkly highlighted by a recent software glitch that came to light within the futures trading platform of the Hong Kong Stock Exchange.

Unable to fix the systems bug, the exchange had no choice but to suspend trading, which meant that issuers of listed products on the Hong Kong market struggled to properly hedge risk and to deliver a fair price to the market.

Confusion reigned supreme. Some firms recalibrated their systems to deal with the outage – which they were able to do by identifying the issue early enough in the day – while others stopped offering quotes, letting market forces take over instead. At least one issuer chose to suspend trading in the listed products market altogether.

Of course, the outage at HKEX is only the latest example of a long string of technology failures that have occurred at exchanges or other providers of financial infrastructure over the years.

Giving consideration to the knock-on or spillover effects is as important an exercise as a cyber risk management itself

In 2014, a lightning strike at the Singapore Exchange knocked out securities and derivatives trading at the exchange for half-a-day, severely undermining traders’ ability to manage risk. This is despite SGX having as many as four backup systems, which ordinarily should have been enough to keep things running smoothly; but everything failed at the same time.

In 2016, the Australian Securities Exchange had to temporarily suspend trading when a hardware failure brought down one of its equities trading database at the same time as its backup data centre failed.

The list goes on.

So, given the capricious nature of such systems failures, what should be done to soften the blow?

Technology failures are an inevitable part of the modern world, and it is not always possible to know when and how they are going to occur. But, as with death and taxes, proper planning can go some way to easing the pain.

Take the example of the recent systems failure at HKEX. The outage itself was bad enough, but it was made far worse by the widespread market confusion that ensued. With products trading at wildly differing prices – and at least one issuer suspending trading altogether – clients didn’t know where they stood.

Some have argued that it might have been better had the exchange suspended trading-affected products altogether – preferably with some rule about knockout events – rather than leaving everything to the whims of the market.

In view of the certainty that technology failures will occur sometimes, giving consideration to the knock-on or spillover effects is as important an exercise as a cyber risk management itself.

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