Prof. Jayanth R. Varma’s Financial Markets Blog

A blog on financial markets and their regulation

Exchange Software Bugs Yet Again

Three instance of software glitches from Japan, United Staes and India during the
last two months have
convinced me that exchange software must go open source. This software is too
important to be kept
under wraps. The complete source code must be disclosed to the whole market
to prevent recurrence of such problems.

Today’s Business Standard (N Mahalakshmi, “Sebi to audit NSE
systems”, Business Standard, January 25, 2006) reports
that the Securities and Exchange
Board of India intends to conduct a systems audit of the National Stock Exchange
(NSE) in response to the software bug in the computation of the index
last week.

The NSE’s
description
of the error is as follows:

The special session for Reliance Industries Ltd was held from 8 a.m. to 9 a.m.
so as to discover the price after the demerger. …
After the close of the special session the volume weighted average price for
Reliance Industries Limited was Rs. 714.35. The adjustments to the base
index value were suitably carried out to compute the index value so as to give
effect to the demerger of Reliance Industries Ltd.

Trading was resumed as per normal market timings …
The market opened and the correct adjusted index value of NIFTY was also
displayed to the market at the opening trade. The activity of NIFTY index computation
was closely monitored after market opening and it was seen that the first few NIFTY
index values were computed correctly taking into account the adjusted base
index value. However once the first trade in Reliance Industries Ltd. was executed,
it was observed that the NIFTY Index reflected incorrect value. The problem
was analysed and found that due to memory initialization failure the
last traded price being reckoned for index computation purpose was carrying
an incorrect value. This resulted in a wrong NIFTY index value being displayed.
The problem was identified and changes were carried out to reflect the correct
value of the NIFTY index. The NIFTY index dissemination was stopped at 10.30 a.m
and the correct display of NIFTY index value was made available to the market
from 10.56 a.m onwards. The other indices remained unaffected.

This is the third serious exchange software bug that I have come across in the
last two months. The other two errors happened in the two largest capital markets
of the world:

  1. Last month, a software bug at the Tokyo Stock Exchange prevented a trader from
    cancelling a large erroneous order. I blogged about it
    here
    and

    here
    .
  2. Last week, a computer glitch at the Nasdaq casued closing prices of
    NYSE listed stocks to be misreported.

    Yahoo! News
    reported that
    “at approximately 5:50 p.m.
    Eastern time Wednesday, … 16,669 transactions involving NYSE- and AMEX-listed
    stocks that had been made at 9:50 a.m. were reposted to the consolidated list.
    In many computer systems, those transactions overwrote the final closing price
    posted earlier that afternoon.

I am therefore completely convinced that exchange software must go open source.
Alternatively, exchanges must take out
large insurance policies to compensate any aggrieved party. By large, I mean
something like 10% or 15% of the daily trading volume.
For the NSE this may be therefore be in the range of a billion dollars.

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