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Even with prep, did Wall Street's business continuity plans fail?

IDC report slams regulators and stock exchanges

November 1, 2012 06:45 AM ET

Computerworld - Hurricane Sandy exposed a decided lack of contingency planning on Wall Street, according to a report by a research firm.

With the Northeast still experiencing the effects of widespread storm damage, the business continuity plans of stock exchanges and financial services companies will continue to be put to the test in the days to come, IDC Financial Insights stated in a report released Tuesday.

Megastorms like Sandy, which may become more common in the future, are good reminders of the need to double-down on business continuity planning, the report said.

"Not only has Sandy exposed the susceptibility of the contingency plans devised by major market players (exposing a lack of foresight concerning the potential impact of a hurricane that can simultaneously hit the [New York-Connecticut-New Jersey] area), but it has also given insight into [financial market regulators'] apparent inability to monitor electronic markets," IDC stated.

For the first time since the Sept. 11, 2001, terrorist attacks, the New York Stock Exchange voluntarily shut down for two straight days, opening again on Wednesday. As of Friday of last week, the exchange had planned to remain open throughout the storm.

IDC Financial Insights faulted the U.S. Securities and Exchange Commission and the Financial Industry Regulatory Authority, saying the industry watchdogs were "all too happy for stock markets to shut down completely," making it clear that the regulators had little confidence in their ability to police an entirely electronic market.

According to IDC Financial Insights, "there is little evidence to suggest that business continuity plans across Wall Street have so far stood up to such [difficult] conditions."

For the past three years, the NYSE Euronext stock exchange has had a contingency plan -- known as "Print as N" -- which in the event of a disaster allows it to remain open as an electronic-only operation using its Archipelago (Arca) Exchange communications network. However, the NYSE changed those plans after talking to regulators and investment firms.

The exchange chose to shut down out of concerns about fairness -- it wasn't sure all traders would be able connect to the Arca network, according to an NYSE spokesman, who added that officials were also concerned about customer safety.

The NYSE's "Print as N" plan calls for using Arca as the primary market, filtering NYSE trades through it using the letter 'N' to designate NYSE transactions.

At no time were any of the NYSE's data centers offline because of the storm, the spokesman said. The exchange could have remained open had it chosen to do so, but it chose the path of common sense instead, the spokesman said.

The SEC could not be reached for comment at deadline.

"The systems were fine -- it was getting people to run the systems that was the issue, which in of itself is also an issue, as they were unwilling to run without human intervention," IDC Financial Insights analyst Marc DeCastro stated in an email response to Computerworld.

However, IDC's report criticized the NYSE's contingency plan, "or as it turns out, the lack of a continuity plan," for such a natural "black swan" event, because the plan called for the stock market to operate "as an electronic-only exchange for the first time in its history."

"Keeping the market open on a purely electronic basis, with the market having never operated this way even under perfect conditions, would only increase the chance of any minor malfunction to a high-frequency trading algorithm, causing potentially great disruption," IDC wrote.



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