BSE Ltd had a major network outage on Thursday, forcing it to shut all its markets for about three hours. While trading time reduced by less than half the normal time of six-and-a-half hours, turnover on the exchange’s equity and equity derivatives segment fell at a much faster pace. Equity derivatives worth 13,395 crore were traded on Thursday, compared with a turnover of 51,536 crore on Wednesday.

Outages on stock exchanges are painful for investors, and, given the vast amounts of money that are involved, avoidable at all costs. One lame excuse that’s often used is that exchanges the world over have faced outages and their occurrence isn’t very rare. In India, National Stock Exchange of India Ltd (NSE) has had its fair share of technical problems as well. In 2012, NSE said its derivatives segment was shut briefly owing to a technical glitch, although exchange members told journalists that the problem persisted for a few hours.

While it’s true that one should be prepared for downtime with all technology, those in the stock exchange business must use the best available infrastructure to minimize technological problems.

Securities and Exchange Board of India (Sebi) has done well to ask for a report on BSE’s shutdown. It should go further. When Tokyo Stock Exchange (TSE) faced a number of technical glitches in 2012, Japan’s Financial Services Agency (FSA) slapped it with a ‘business improvement order’. FSA asked the exchange for measures it would take to ensure a repeat doesn’t occur, which would then be scrutinized by a panel of outside experts before being implemented. TSE simultaneously also announced a sharp cut in pay for its top officers.

Last September, after an outage at Nasdaq, the US Securities and Exchange Commission chair met privately with top executives of major exchanges and later announced five reforms to address trading-related problems, according to a Reuters report.

Sebi may need to take similar proactive measures. It should first probe the quality of infrastructure used by Indian exchanges. A recent trend in the Indian markets has been a rush for speed with assertions that new trade matching engines do the task in microseconds (one microsecond is a millionth of a second). While this doesn’t necessarily mean that safety has been compromised, it will be worthwhile to check if this is the case. Sebi should also ask exchanges to publish details such as downtime in SLAs (service-level agreements) with network and other technology service providers.

When such data is publicly available, investors can make informed choices about which venues they would prefer to post capital and trade, apart from looking at other factors such as liquidity and speed of access. Of course, one could argue that it is in an exchange’s best interests to invest in the best technology as outages can drive away users. But past experience doesn’t support this argument very well. A prod from the regulator should achieve better results.

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