NYSE's contingency planning under fire after Sandy

Exchange's failure to launch backup plan criticized; NYSE spokesman calls jabs 'incoherent'

Oct 31, 2012 @ 4:02 pm

By Dan Jamieson

NYSE, stocks, markets
+ Zoom

NYSE Euronext is taking some heat for not being able to implement its backup plan in the event of a disaster.

So what's in the plan?

Under NYSE Rule 49, approved by the Securities and Exchange Commission in December 2009, the New York Stock Exchange can declare an emergency condition and designate its NYSE Arca electronic platform as the alternative venue to its physical floor. Arca can receive and process orders for up to 10 days under the plan.

The rule requires the NYSE to switch to Arca “as soon … as possible, but not earlier than at least the next trading day" after an emergency condition has been declared.

As part of the plan, the NYSE phased out an older contingency trading floor. The exchange's purchase in 2006 of Arca, then known as Archipelago, was seen as a critical step in providing a backup to the trading floor in Lower Manhattan. The Arca purchase included a secondary data center run out of Chicago as a backup to the NYSE's main data center in Mahwah, N.J.

But the plan to switch over to Arca didn't work as expected in the face of Hurricane Sandy.

The NYSE said its Arca backup was ready to go as Sandy approached the East Coast late Sunday, but the other trading platforms, which use the NYSE to make trades and set prices, reportedly didn't trust the plan and >balked at going live.

Former SEC Chairman Arthur Levitt, sparked some critical coverage yesterday when he took the Big Board to task for not having a remote backup facility. Mr. Levitt made his comments during an interview on Bloomberg Radio.

NYSE spokesman Robert Rendine said the size of the impending storm would have made it difficult to ensure the safety of NYSE and other industry employees in the New York area.

“At the end of the day, we all agreed that safety trumped everything,” he wrote in an e-mail. “A quick look [out] the window ought to answer that question to everyone's satisfaction.”

That is “a crazy story about New York not being open because they're worried about their people,” countered Chris Nagy, founder of KOR Trading LLC, a consulting firm, and the former head of order routing at TD Ameritrade Holding Corp.

Mr. Nagy was an early critic of the shutdown via Twitter.

“Of course they should worry about their people, but at the same time, there should have been ample planning and backup,” he said, which should include plans to operate without staff in New York as part of the exchange's business continuity plan.

Mr. Rendine called Mr. Nagy's criticism “incoherent,” noting that the NYSE does indeed have backup capability in Chicago.

Even with that backup, it “doesn't obviate the need for people to come to work at the firms that trade,” Mr. Rendine added.

“The flaw in big corporate business continuity planning … is that so much goes into a formal switchover, it's really hard to test,” said Christopher Winn, a managing principal at compliance consultant AdvisorAssist LLC and a former compliance official at the Evergreen Funds.

“The critical person [you need] to make the switch might not be there,” he said. And “no one is going to be able to figure out what to do in the middle of a storm,” Mr. Winn added.


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