What happens when an Exchange goes down?

[JTrader]

Hi

If an exchange goes down what happens to open trades?

Lets say CBOT goes down just after you'd gone long on the Dow at 12514, at what price is the exchange likely to come back online at?

Does the exchange come back online at the same price as it went down at?

Or could it come back online -40 points below where you entered the long trade?

if so, is this just tough luck for you?


What causes the exchange to go down in the first place?

Is it an IT problem at the exchange, a problem with the exchanges order book?


Are there major differences in the rules and proceedures between different exchanges - CBOT, CME, LIFFE, LSE etc. for dealing with such crashes - for the price at which an exchange comes back online at, following a crash, open trades etc.?

Thanks a lot.

 

[Jack o'Clubs]

Interesting question as CBOT's gone down the last two days, I guess an IT problem. All that happens is that when it comes up you start trading again: if like yesterday the cash markets have been doing well then the Dow will 'open' gapped up, just like at the start of a day's trading if there's been stuff happening overnight. If you think about it, it couldn't do much else: it's a market and if something's changed while it's been down then the price people are willing to trade at will have changed too. Not sure what the compensations is if any - I would guess they're well covered in their legal documents for outages of this type. Bloody annoying though, especially for agriculture traders yesterday who were having an exciting enough day as it was without the exchange going down for an hour or so as well

 

[Directional]

you just have to be aware that such an occurence is always a possibility, and ensure you have a way of hedging your position if you need to.

This could be via a CFD, SB or comparable, if the shop would let you trade while the exchange was down.

A better solution would be to hedge in the pits, which wouldnt stop trading, or buying put or call options with a delta of around 0.5, or to hedge on another exchange, for example Eurex US quote some of the US market indexes.

Or to hedge in an ETF such as DIA for the Dow or SPY for the S&P etc.

Essential to make contingency plans for everything, and to have your clearers dealing numbers on the wall or easily accessible in the event of PC failure, UPS failure etc.

 

[Jack o'Clubs]

Good advice Arb. Harder to hedge those agriculturals though - although most of them were locked limit up yesterday anyway... (guess who was short....) !

Note bland CBOT comment after the last couple of days problems:

http://www.cbot.com/cbot/pub/cont_detail/0,3206,1036+45456,00.html

 

[gc1]

If the CME Globex system ever goes down when trading the ES you can always offset your position in the PIT SP contract (ES and SP are completely fungible in a 5:1 ratio) provided you always trade multiples of 5 ES contracts.

I.e. you are not hedging, one long SP and 5 short ES (or vice versa) can be canceled out against each other in the CME's end of day processing if the broker notifies the exchange within the appropriate time limit.

Of course, if you are using one of the discount brokers who have no pit access, then this tip does not help.

 

[JEDI]

I had first hand experience yesterday when I was long on the YM & the exchange went down, never having been in this position before I rung IB and asked if the market would re open at the same price & the guy on the end of phone rightly said " The world does not stand still because exchange has gone down" so all i could do was hope & pray the market would not move against me to much as luck would have it the market re opened 29 points higher & I closed my trade for quite a large profit for me, as I only look to gain around 5 points per trade.

 

[Directional]

Jedi, was a pure gamble though doing that - could easily have been 29pts the other way, or even more.

IB certainly have access to enable you to hedge off all risk completely into the DIA's and then you could have unwound it when the exchange reopened

 

[JEDI]

I agree Arbitrageur it was a pure gamble however when I spoke to the guy at IB he did not offer me any other option but simply to wait until the exchange opened.
As luck would have it the Gods were on my side yesterday because as you rightly pointed out the trade could have just as easily gone the other way.

 

[dcarrigan]

I agree Arbitrageur it was a pure gamble however when I spoke to the guy at IB he did not offer me any other option but simply to wait until the exchange opened.
As luck would have it the Gods were on my side yesterday because as you rightly pointed out the trade could have just as easily gone the other way.

you could of opened a pit trading connection. think its abou t$40, but dont quote me on that. i accidently opened the feed on my first start at ib till i realiesed i didnt need it, just checked $55 a month.

 

[Directional]

I agree Arbitrageur it was a pure gamble however when I spoke to the guy at IB he did not offer me any other option but simply to wait until the exchange opened.
As luck would have it the Gods were on my side yesterday because as you rightly pointed out the trade could have just as easily gone the other way.

not criticizing you btw - IB should have at least told you of that possible course of action, unfortunately customer service & support at IB is generally very sucky & one of their well known failings.

nice to see you came out with points in the bank anyway.. :cheesy: normally, if the market has an opportunity to punish you, it usually always does, as hard as it can!!

 

[Tuffty]

What causes the exchange to go down in the first place?

Useful list here including planned and un-planned closings for the NYSE since 1885!

www.nyse.com/pdfs/closings.pdf

 

[bearishtrader]

I agree Arbitrageur it was a pure gamble however when I spoke to the guy at IB he did not offer me any other option but simply to wait until the exchange opened.
As luck would have it the Gods were on my side yesterday because as you rightly pointed out the trade could have just as easily gone the other way.

You could hedge 1 ES for every 3 YM or take 500 shares of DIA (traded on the AMEX or American Stock Exchange) for each YM. The same could be done for DIA options at 5 DIA options to 1 YM contract. We recently published a free video for a strategy to follow on our site.

 

[notouch]

It's time to abandon YM in favour of ES until YM is put on GLOBEX. I can't think of any good reason to trade with the sick man CBOT any more.