By Stephanie Yang
Wall Street's latest worry: Y2K's distant cousin, the leap
second.
Traders and exchange officials are prepping for the latest
incidence when a seemingly innocuous time change could potentially
cause havoc if computer systems aren't made ready.
In this case, it is the leap second, an event that happens every
few years when the standard time around the world is adjusted by
one second to account for a slight mismatch between clocks and the
Earth's rotation. With lightning-quick trading tied to computers
now the norm in markets, the leap second has regulators, exchanges
and traders worrying about potential pitfalls like it is 1999.
"These guys are agonizing over it," said Steve Allen, a
programmer-analyst at the University of California's Lick
Observatory. "It is definitely a hassle."
This year, the leap second will be added on June 30, right
before 8 p.m. Eastern Daylight Time, or midnight Coordinated
Universal Time/Greenwich Mean Time, when after-hours markets are
usually still open for trading in the U.S. and some major Asian
markets are just starting up.
Potentially complicating matters, exchanges globally are
approaching the extra time differently, with Asian markets largely
planning to trade as planned, while U.S. exchanges make moves to
curtail trading around the leap second.
Exchanges also have varying approaches to account for the extra
second.
The U.S. Commodity Futures Trading Commission requested that all
exchanges turn in a plan of action by Friday. "For the most part,
we're not too worried," said a CFTC spokeswoman. "But of course as
the regulator, we do need to ensure folks are ready,"
The Futures Industry Association, a trade group that includes
banks and brokerage firms, hosted a webinar Thursday for about 130
industry professionals on the issue.
Many in U.S. markets still worry about technology glitches after
the May 2010 "flash crash" and other problems from trading-desk
systems gone awry. The risk in adding a leap second is that trading
desks will be unprepared to accommodate the extra tick of the clock
and could break down, act unpredictably or give investors a faulty
time stamp on a trade.
Mr. Allen, the analyst who has studied leap seconds, expressed
concerns that different markets appear to be taking varied
approaches to the issue. That could heighten the chance of
investors' transactions being rejected or related system failures,
he said.
Many exchange officials and regulators say the event likely will
pass without incident, just as the much-feared Y2K bug was a dud at
the start of the new year in 2000. In that event, firms from a
variety of industries spent years preparing their computers to deal
with the extra zeros at the end of the year, but in the end,
disruptions were minimal.
But the leap-second risk isn't hypothetical. When the last leap
second was added, over a weekend in 2012, several high-profile
websites suffered problems, including those of LinkedIn Corp.,
Reddit, Yelp Inc. and Qantas Airways Ltd.
The coming leap second is the first to take place during active
trading hours since 1997, when computers and algorithms weren't
nearly as important to markets as they are now.
"This is really an industry issue," said Brian Adams, chief
information officer at brokerage firm Rosenthal Collins Group and
vice president in the FIA's market-technology division. "It's now
up to us to really understand how this is going to impact our
world, so we all need to be prepared."
CME Group Inc.'s Chicago Mercantile Exchange and
Intercontinental Exchange Inc., which trade futures and other
derivatives tied to stocks and bonds, plan to delay some regular
openings of their electronic evening sessions until after 8 p.m.
Eastern time to circumvent the leap second. Many contracts on the
two derivatives-trading giants open for electronic trading in the
U.S. during the evening hours and then trade continuously until the
late afternoon
or early evening the following day.
On June 30, the exchange operators are pushing back trading in
some product markets, including agricultural commodities, natural
gas, crude oil and S&P 500 stock-index futures and options.
In a statement, ICE said it is "confident" the leap second "will
not cause any issues on our systems; however, we cannot guarantee
the same for all systems used by our participants, market data
vendors, and other third parties."
Large U.S. stock exchanges including New York Stock Exchange's
NYSE Arca, Nasdaq OMX Group Inc.'s Nasdaq and BATS Global Markets
will close their after-hours sessions 30 minutes before their
regular 8 p.m. close.
While European markets including London are largely closed when
the event is scheduled to occur, other markets affected include
Japan, Australia, South Korea and Singapore, which all will go
about normal trading and plan to handle the leap second different
ways.
According to the FIA, markets in Japan plan to deal with the
leap second with a process known as dilution, where the seconds
leading up to the extra second are stretched out slightly.
Australia and South Korea will dilute the time in the seconds
following the switch. Singapore markets won't adjust for the extra
second until the morning after the leap second, the FIA added.
One trading firm, KCG Holdings, has spent the past couple of
months testing software for each individual reaction to the leap
second, said a person familiar with the matter. Others are ramping
up in recent weeks or making plans to reduce trading around the
event.
Firms "might come out of it with records that are not
trustworthy," noted Victor Yodaiken, chief executive of FSMLabs,
which assists Wall Street firms with synchronization issues. It has
the potential to lead to some "very expensive days."
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