UPDATE 2-CBOE blames second outage on move to longer trading day

Thu May 2, 2013 3:42pm EDT

(Adds background, investor comment)

By Ann Saphir

May 2 (Reuters) - The Chicago Board Options Exchange blamed its second outage in a week on fallout from preparations for expanding trading hours, but executives said they had no plans to abandon the longer trading day and will hire an outside consultant to help.

The start of trading in one of 25 business "clusters" of stock options was delayed Thursday morning for about 10 minutes, with the system unable to handle complex orders in all affected products for the first 34 minutes of the trading day, CBOE said in a memo to clients.

The delay was minor compared with last Thursday's half-day outage, which the CBOE later blamed on a software bug that surfaced as the exchange was preparing for lengthening the trading day to capture more overseas business.

Still, it calls attention to the complexities of the technology that acts as the plumbing behind the millions of options traded daily at the biggest and oldest U.S. stock-options exchange, and more broadly raises questions about the reliability of computer-dependent financial markets.

CBOE releases first-quarter results on Friday.

While investors were quick to dismiss last week's trading disruption at CBOE as a one-time event, a second failure in a week may raise red flags.

"You are usually given one on the house," Caldwell Securities Chairman Tom Caldwell told Reuters shortly after last week's breakdown at the CBOE. "If you have two or, heaven forbid, three breakdowns in a narrow time frame, then it's a problem."

Caldwell is a major holder of CBOE shares.

CBOE Holdings Inc, which owns the options market, is planning to add 45 minutes to the trading day of its VIX futures contracts starting May 30, and plans to extend trading by several hours more in June using a new hub in London. VIX futures are tied to the CBOE Volatility Index, better known as Wall Street's "fear gauge."

Eventually CBOE also plans to extend trading at its main options exchange, which offers trading in VIX options, executives have said.

CBOE's options and futures exchanges use the same electronic trading technology, developed in house.

The expansion of VIX futures trading hours is aimed at winning customers outside U.S. borders for VIX futures and "ultimately the full VIX product platform" including CBOE's flagship options on VIX, said Bill Luby, the author of the VIX and More blog in San Francisco.

The most recent disruption at CBOE "was triggered by a product maintenance function being performed for a symbol change to one of the classes in the cluster," CBOE CEO William Brodsky and CEO-designate Ed Tilly said in a memo to clients. Tilly takes over from Brodsky after an annual shareholders meeting later this month.

"The software maintenance function was recently updated in preparation for the extended trading hours initiative," they said.

The exchange operator is "in the process of retaining an independent systems consultant to thoroughly evaluate the rollout procedures associated with our extended trading hours initiative," they said.

Unlike last Thursday's outage, which hit all CBOE trading, the most recent delay did not affect trading in CBOE's exclusive stock-index options. (With reporting by Doris Frankel in Chicago; Editing by Nick Zieminski, Bernadette Baum and Chris Reese)

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