Prof. Jayanth R. Varma's Financial Markets Blog

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Prof. Jayanth R. Varma's Financial Markets Blog, A Blog on Financial Markets and Their Regulation

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jrvarma@iimahd.ernet.in

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Wed, 25 Jan 2006

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.

Posted at 12:30 on Wed, 25 Jan 2006     3 comments     permanent link

Comments...

Godly Abraham wrote on Thu, 02 Feb 2006 01:27

Re: Exchange Software Bugs Yet Again

Sir, I may be wrong but I would like to present 2 contrary points here. While open source has its advantages, I am only worried on account of the following: 1. Ownership of open source Software: while it is easy for OS to go opensource ...but an exchange software is hugely demanding real time application. The software community still have not seen any major real time applications go open source. So if the exchanges take the bold step of going open source, if a bug creeps in, who takes responsibility. 2. Open source software take time to evolve into the kind of software that exchanges require. It may take upto 10 to 20 years. Hence, the immediate solution cannot be open source though exchanges can look at it as some long term plan.

I would like to suggest a different solution. I think major exchanges should get together and start looking at developing a common global standard for exchange softwares. Then the software can be developed in house or outsourced given their conformity to the global standards. <am not sure whether this is being done currently>.

wrote on Thu, 09 Feb 2006 17:36

Re: Exchange Software Bugs Yet Again

Opening up source code is really not a recommended solution to system glitches. Public visibility to source code is really not the solution of choice. A better solution would be to build improved fault tolerance and recovery capabilities into the system.

Jodhbir wrote on Thu, 14 Dec 2006 18:26

Re: Exchange Software Bugs Yet Again

Though its true that open source results in a much more robust and secure program but every piece of code cannot be made open source. There are some inherent drawbacks of open source code, the most common being lack of good programmers for a highly specialized field. Also, some part of the code which is open to others - like the ability to place orders on the system cannot be made open source as a bug might be exploited by a clever programmer for his/her benefit.



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