* Latest in string of tech-related problems in U.S. markets
* Outage meant no access to CBOE options on S&P 500, VIX
* CBOE opened all options trading at 1 p.m. EDT (1700 GMT
* Traders took opportunity for long lunches
(Updates with CBOE CEO not commenting during speech)
By Doris Frankel and Ann Saphir
CHICAGO/SAN FRANCISCO, April 25 (Reuters) - A software
glitch shut down the Chicago Board Options Exchange for half the
day on Thursday, preventing trading in options on two of the
U.S. stock market's most closely watched indexes and delivering
the latest blow to confidence in the way U.S. financial markets
Coming just days after hackers attacked the website of stock
broker Charles Schwab Corp and a false news report on the
Associated Press's Twitter account sent the stock market into a
brief but steep tailspin, the incident brought attention to how
technological troubles can roil the markets.
The systems outage at CBOE, which the exchange said was "in
no way related to a cyber-attack," comes as U.S. securities
regulators are contemplating new rules that would require
exchanges to have testing and backup systems in place to deal
with technological errors or natural disasters.
"As more and more of these events happen, it does hurt
confidence," said Giri Cherukuri, head trader at OakBrook
Investments LLC in Lisle, Illinois. "Exchanges are going to be
more vigilant about how their systems are structured and that
there are safeguards and backup systems."
These events have shaken investors' confidence about whether
markets can be fair and orderly given how dominated they now are
by complex, computer-driven systems.
Taken together, the rash of recent incidents means "you have
the individual and now institutional side both affected by
disruptions," said Justin Walters, co-founder of Bespoke
Investment Group. "Technology can continue to advance, but I
think this does show how our market structure is vulnerable, to
The CBOE, run by CBOE Holdings Inc, sought to draw
a line between its problems and recent hacking incidents,
blaming "an internal systems issue" and not "outside influence"
for the three-and-a-half-hour closure.
In a memo to clients, CBOE chief executive Bill Brodsky and
other top executives expressed regret for the outage, and said
they have "isolated the software issue that caused the problem
and have made the necessary adjustments for a normal opening" on
Friday. The exchange is conducting a review to make sure there
is no recurrence, they said.
The failure also raised new questions about the Chicago
exchange's hold on options trading in two of the most closely
watched instruments in the financial markets, the Standard &
Poor's 500 Index and the CBOE Volatility Index.
The contracts are used by institutional and retail investors
to bet on and hedge against swings in the overall U.S. stock
"This is a big damage to the options industry because the
SPX is such a significant product," said J.J. Kinahan, chief
strategist for TD Ameritrade, speaking at an options industry
conference in Las Vegas attended by CBOE's Brodsky and hundreds
of other market participants. CBOE's shutdown was the talk of
"It is a wake-up call for individual exchanges to ramp up
their technical systems, and even before the regulators,"
The U.S. Securities and Exchange Commission said its staff
became aware of the situation just before the opening Thursday
morning and monitored developments throughout the day.
"CBOE has determined that this was an internal systems
issue. The Commission staff will continue to consult closely
with the CBOE to understand the precise reason for the trading
interruption and remediation measures. The Commission will
continue to focus on market technology," said SEC spokesman John
GAME OF MONOPOLY
CBOE has for years successfully fought off attempts by rival
exchanges to offer its proprietary - and lucrative - stock-index
options, winning court backing for its right to list them
exclusively. One rival lost no time in pressing the point.
"This situation brings up a great argument why the
regulators should be concerned about single-listed products,"
said Ed Boyle, senior vice president of strategy at the BOX
Options Exchange on the sidelines of the Las Vegas conference.
The incident got a lot of attention from those attending the
annual Options Industry Council conference in Las Vegas. "I woke
up and saw all these emails and at breakfast, everyone was just
checking their phones, asking, 'What happened at CBOE?'" said
Steven Crutchfield, head of U.S. options at NYSE Euronext
When approached by a Reuters reporter at the conference,
CBOE's Brodsky, who is retiring in May, declined to comment. He
also did not mention the incident during his speech at a gala
dinner at the conference.
CBOE licenses on S&P 500 Index and VIX options prevent the
contracts being offered on other exchanges. Illinois courts have
upheld the CBOE's monopoly against past challenges from
But the legal system may not have had its final say in the
matter: Citadel LLC, a large Chicago-based hedge fund and one of
the biggest market makers in U.S. options, has asked the U.S.
Supreme Court to decide the dispute over CBOE's right to list
the stock-index options exclusively.
More than 50 million of these exclusive contracts - by far
CBOE's most lucrative products - changed hands at the CBOE in
"The perception is not great, given the intensity with which
they fought to keep S&P 500 options as an exclusive listing,"
said Jared Woodard, principal at Condor Options, an options
research and advisory firm based in Forest, Virginia.
Still, other market participants said traders and investors
had alternatives to the exclusive CBOE contracts that enabled
them to execute their strategies.
Trading on 10 other U.S. options exchanges continued
unimpeded, and traders wanting to hedge positions in the S&P 500
could use options on the main S&P-tracking exchange traded fund,
the SPDR S&P 500 Trust. Several strike prices of the SPY
were the top-traded contracts on the day.
"There is no shortage of other venues to trade on," said
Steve Sosnick, equity risk manager at Timber Hill, a division of
Interactive Brokers Group. CBOE handles less than 20 percent of
all options on individual stocks on a normal day.
Traders at the Chicago options exchange appeared only mildly
Mark Wolicki, a 38-year-old trader for Zydeco Asset
Partners, said he took the opportunity to go out for lunch at a
nearby burger-joint and rushed back when CBOE announced markets
"It was annoying but that's about it," said one trader, who
declined to be named. Another complained about lost business.
"There was nothing to do," he said, striking the pose of a man
The Chicago exchange is the oldest U.S. options market. Most
trading of options on individual stocks takes place via computer
screen, but dozens of open-outcry traders crowd the areas of the
CBOE floor dedicated to CBOE's exclusive stock-index options.
The SEC proposed new rules last month following a string of
high-profile issues in 2012, from Nasdaq OMX's botched handling
of Facebook's initial public offering and Knight Capital's
near-collapse from a trading glitch to the shutdown of the
public markets during Hurricane Sandy. [ID: nL1N0BZEPA].
The SEC's proposal, if adopted, would replace a long-time
voluntary standard known as "automation review policies," or
ARP. In replacing voluntary guidelines with rules, it means the
SEC would be able to take enforcement action against violators.
This week's incidents make investors feel not only less
confident about the market but that there is not always a level
playing field for them, said Rick Meckler, president of hedge
fund LibertyView Capital Management LLC in Jersey City, New
"It's unfortunately a byproduct of a continued move toward
electronic activity where's there's not real human
intervention," said Meckler. "For the individual investor it is
a problem. They don't understand these flash crashes, they don't
understand systems going down."
(Additional reporting by Sarah N. Lynch and Rachelle Younglai
in Washington, Jennifer Ablan Herb Lash and Caroline
Valetkevitch in New York, Tom Polansek in Chicago, and Angela
Moon in Las Vegas.; Writing by Ann Saphir; Editing by Alden
Bentley, Andrew Hay, Bob Burgdorfer, Dan Grebler and Paul Simao)