Monday, June 29, 2015

Markets Are Jumpy Over Coming Leap Second

Markets Are Jumpy Over Coming Leap Second

It is like Y2K all over again

The leap second 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. And it has some exchanges and financial firms worried. WSJ's Stephanie Yang reports. Photo: AP
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 expecting 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 and systems 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
National Institute of Standards and Technology physicists Steve Jefferts and Tom Heavner with the NIST-F2 cesium fountain atomic clock ENLARGE
National Institute of Standards and Technology physicists Steve Jefferts and Tom Heavner with the NIST-F2 cesium fountain atomic clock Photo: NIST
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.”
Write to Stephanie Yang at

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