WASHINGTON - A network interruption that brought down one of the financial market's largest inventory management systems Friday morning stifled municipal bond trading on some platforms and highlighted the vulnerability of the fixed-income market to technological failures.
Bloomberg L.P.'s Trade Order Management System or TOMS was among the Bloomberg products that experienced problems when the company's network went down around 3 a.m. Eastern Daylight Time, as a result of what the company called an "internal network issue."
Bloomberg fully restored its service before noon and apologized to affected customers. "There is no indication at this point that this is anything other than an internal network issue," Bloomberg tweeted after the outage. "Service has been fully restored. We apologize to our customers for the disruption."
Dealers use Bloomberg's system to manage their inventories and facilitate business on trading platforms, including alternative trading systems. Service was restored to most customers shortly after trading opened in New York, but some market participants said they still noticed a drop in trade volume.
Tom Vales, chief executive officer at the ATS, TMC Bonds, said his firm saw trading volume drop to about half of what is expected on a normal day and that roughly 150-200 firms and 11,000 potential transactions appeared affected.
Friday's events came nearly five years after the far more disturbing May 6, 2010 "Flash Crash," when high-frequency electronic trading systems aggressively liquidated their positions and then exited market, creating a liquidity crunch and contributing to a sharp drop in the equity markets.
The SEC adopted Regulation Systems Compliance and Integrity, or Reg SCI, late last year in an effort to safeguard the market from critical system failures. SCI requires self-regulators, ATS', and other services plugged into the capital markets to shore up their policies and procedures to prevent and deal with technology problems.
But ATS' that deal exclusively with corporate and muni bonds were exempted because the SEC determined that the fixed-income markets pose less systemic risk and are not as reliant on automation as other markets.
The SEC is not empowered to regulate third-party private information vendors like Bloomberg, but guidance included in Reg SCI's adopting release suggests that entities regulated by the rule have a responsibility to evaluate their relationships with their vendors.
"If an SCI entity is uncertain of its ability to manage a third-party relationship (whether through due diligence, contract terms, monitoring, or other methods) to satisfy the requirements of Regulation SCI, then it would need to reassess its decision to outsource the applicable system to such third party," the SEC release on the final rule said.
Bloomberg competes with other similar services, such as Thomson Reuters. But most dealers choose to have only one such service because of the expense, sources said.
The Municipal Securities Rulemaking Board's EMMA system did not appear to register a notable drop in trading activity, said sources who did not want to be identified. While individual dealers could theoretically have difficulty reporting their trades to EMMA if their vendor was down, the MSRB has a system in place allowing firms to report network trouble.
Other ATS platforms also said they were affected by the outage, but declined to comment for the record. Vales said the reliability of systems like Bloomberg's is "self-policing" because its reliability is key to its business model.
"The integrity of your system is everything," Vales said. "We're a relatively small market, but for the participants that are in it this can have a great effect."
