A technology outage occurred around 1:40 pm on Friday, April 27, 2018 and it brought all marketplaces operated by the TMX offline. The impact was widespread. We saw considerably reduced trading in TSX and TSXV-listed securities; many investors were left uncertain about the status of their orders; and there was a real risk of mispriced trades. This happened despite the fact that multiple other marketplaces facilitating trading of these securities, including NEO, were fully operational. All other marketplaces, including ourselves, continued to process orders and trades in TSX and TSXV-listed securities, as well as in our own listed securities, without any issues.
What happened?
The graph below compares consolidated trading volumes in TSX and TSXV listed securities across all marketplaces between April 26 and April 27 and provides us with a good overview of what happened on April 27:
Between 1:00 pm and 2:00 pm, the TMX goes off-line. Trading continues on other marketplaces, but overall volumes drop considerably.
Between 2:00 pm and 3:00 pm, overall volumes remain low as traders with live orders on the TMX are uncertain about status and not sure whether they should or should not re-route to other marketplaces.
Between 3:00 pm and 4:00 pm, overall volumes start to pick up again after the TMX declared its marketplaces were out for the rest of the day and confirmed cancellation of orders in their systems. But overall volumes remained affected because a large part of the investor community was blind, with no access to market data. Who? Retail investor and Investment Advisors.
On July 8, 2015 the US markets experienced a similar issue when the NYSE went down for about 4 hours. The key difference? No one was impacted and trading in NYSE-listed securities continued as normal without any interruptions, slowdown in activity or mispricing.
Thus, an obvious question: why is such an event seamlessly handled in the US, while in Canada it heavily impacted trading?
Why is the US experience different than the Canadian experience?
Before I get into the reasons for this, I would like to first and foremost state that no one should point the finger at the TMX and blame them for what happened. May those who have never experienced technology issues throw the first stone. I wont, because we are all exposed to technology glitches and while a lot can be done to mitigate the risk of it happening, no one can give a 100% guarantee it will never happen.
Lets get back to the reasons why the experience in Canada is so different than the experience in the US when a listing stock exchange experiences a major outage. I see two main reasons:
There is a serious lack of true consolidated market data in Canada. Retail investors using direct investing platforms only see market information from the TSX and TSXV trading platforms. Investment Advisors are typically also only given access to trading information from the TSX and TSXV. This means the market went dark for these market participants when the TMX outage occurred. They were unable to see market activity, despite the fact that the broader market kept functioning. Discount brokerages and full service dealers simply dont give the retail community access to market data generated on and published by other marketplaces, including NEO, despite the fact that these other marketplaces represent close to 40% of all volume traded in TSX and TSXV-listed securities, and over 60% when it comes to ETFs. Yes, we make NEO real-time data available on our website, but this is not the long-term solution. We have been raising this issue for several years now, have proposed market-wide solutions and even predicted the events of April 27th, as indicated in the infographic below published in early 2017.
The Canadian markets lack a clear, industry-wide mechanism to declare a marketplace out. Subsequent to an outage there is no common rule that declares a marketplace out for the day and determines all live orders on that marketplace invalid. Between the time of the TMX outage and when activity began to migrate from the TMX to other marketplaces, many traders were uncertain about the status of their orders on the TMX markets. The last thing they wanted was to migrate their orders from the TMX to other marketplaces while not certain whether the orders had already traded or could still trade on TSX, TSXV or Alpha. It was only when the TMX self-declared it would not re-open these markets that we started to see orders migrate. A more proactive approach is required to reduce trader and investor uncertainly during times of market outage.
These reasons caused investors, public companies and providers of investment products to have a negative experience trading on the Canadian markets. This impacts market confidence and makes us look bad in comparison with US markets. So, what are the solutions?
We must tackle the market data issue once and for all
The solutions to avoid similar experiences in the future are quite simple:
Mandate access to Canadian consolidated market data for all investors. The US made consolidated market data available to all market participants in the 70s. Its time we did so too.
Establish an industry protocol to properly handle major outages so that market participants know how to react when a marketplace experiences major issues.
Perform industry simulations that are not just focused on marketplaces losing their primary data centres and shifting to secondary centres, but also include marketplaces being totally out without a disaster recovery solution.
Unfortunately, these solutions will not happen until the regulators step in. There are just too many vested interests at play.
So I once again reiterate my call to action for the Canadian Securities Administrators: step in and take us out of these dark ages.
Next Steps
The Canadian Securities Administrators should ensure that their investigation of what happened on April 27, 2018 is very thorough, and looks beyond the processes at the TMX to include the impact on the market and its different types of market participants overall.
Let me be clear: this investigation should not focus on TMX technology and hardware. We know and trust those issues will be resolved.
This investigation should look at why the Canadian capital markets – which operate within a multiple marketplace environment – could not handle a TMX outage. The findings should ensure mechanisms are put in place to ensure a market ecosystem that sees business as usual and seamlessly handles future outages of TMX or other marketplaces, because no one should expect the events of April 27th to be a one-off occurrence.
During this investigation, other single points of failure should also be reviewed and addressed: the TMX closing and opening auctions and the fact there are currently no alternative venues to trade derivatives listed on the TMX Montral Exchange.
Jos Schmitt is President & CEO of NEO Exchange
