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Categorized | Financial

Wall Street contingency plans take heat

Posted on October 31, 2012

Flawed back-up systems marred Wall Street’s return to work on Wednesday, while exchanges and regulators blamed a lack of disaster preparation by some market participants for the extended break in trading.

Michael Bloomberg, mayor of New York City, received sustained applause from traders when he rang the opening bell on the New York Stock Exchange on Wednesday morning, putting an end to the exchange’s longest weather-related stoppage in more than a century. The S&P 500 rose 0.02 per cent to 1,412.16 in the first day of trading since Hurricane Sandy.

    Larry Leibowitz, chief operating officer at NYSE Euronext, which received some criticism for the two-day suspension, said: “Even if we opened on Monday or Tuesday, the securities community was not fully prepared to implement our back-up plan.”

    The NYSE’s contingency plan for a disaster that made running the trading floor impossible was to move all trading to the all-electronic Arca system. But the opening was delayed until Wednesday, people familiar with the discussions say, because numerous trading firms were not prepared and some even needed to rewrite computer code, potentially putting people at risk during the storm.

    The Securities and Exchange Commission is expected to raise concerns with trading firms as part of its deeper review of market structure, a person familiar with the matter said.

    There is no statutory requirement for contingency plans, but since the 2001 terrorist attacks securities regulators have emphasised the importance of being able to operate remotely. One official said it was another blow to market confidence after recent technology failures including the $460m trading glitch at Knight Capital and the botched Facebook public offering at Nasdaq.

    “The reality is that when there is a disaster of this magnitude it is difficult for all market participants to invoke contingency plans at the same time and expect a good outcome,” said Mr Leibowitz.

    “It becomes problematic when people adapt on the fly,” floor trader Gordon Charlop, managing director of Rosenblatt Securities, said. “Given the recent incidents with electronic trading, everybody wanted to err on the side of caution rather than flip a switch and try a whole new way of trading. That would have been asking people to take a lot of risk.”

    The poor preparation was highlighted by another shortcoming at Knight Capital, one of the biggest trading companies in the US by volume. The company, based in Jersey City, just across the water from lower Manhattan, was forced to shut down most of its trading business Wednesday after a back-up generator failed.

    Sullivan & Cromwell, the prominent law firm whose clients include Goldman Sachs, was flooded and advised clients to contact lawyers using text messages after other forms of communication failed. One lawyer noted the firm’s disaster recovery system had shown itself to be inadequate. “It’s a disaster,” he said.

    Companies in midtown Manhattan, headquarters to Morgan Stanley and JPMorgan Chase, fared better – unless they were close to the precarious dangling construction crane at 57th Street. Banks reported pleas for spare desks from some hedge fund clients affected by road closures around that site.

    Platinum Partners, a hedge fund with more than $1bn under management, said that its office in the Carnegie Hall Tower was closed due to the hanging crane. “It’s definitely an inconvenience but thankfully we have good contingency procedures in place. We have a back-up office up and running in Hawthorne, New York,” said Mark Nordlicht, Platinum’s founder.

    Bloomberg, the data provider, said it had provided terminals for more than 100 customers whose offices were out of action and 24,000 people used laptops to remotely access the service from out of the office compared with 7,000 on a normal day.

    Additional reporting by Dan McCrum, Michael Mackenzie and Andrew Edgecliffe-Johnson in New York