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NYSE glitch sends traders scrambling as ETF auctions derailed

NYSE floor

NYSE Group sowed confusion among traders after a technical error hobbled one of its exchanges on Monday, wreaking havoc on hundreds of exchange-traded funds.

NYSE Arca, the largest U.S. listing venue for ETFs, left traders scrambling at the end of the trading day after a system upgrade went awry. An upgraded version of its software that went live on Monday derailed closing auctions for certain securities, a key moment at the end of the trading day.

The exchange shifted to backup methods for calculating the closing prices for most names, and went back to using an old version of its software, according to an email to clients. A total of 341 symbols did not complete their closing auctions, the exchange said.

“We take these matters very seriously,” Stacey Cunningham, NYSE's chief operating officer, wrote in the email.

While high-profile exchange malfunctions are becoming rarer in the $27 trillion U.S. stock market, Monday's fault highlights the importance of closing auctions, which have assumed a bigger role with the growth of passive investing. Out of 1,230 Arca-listed securities, only 53 were closed through the normal auction-driven method. Those affected by the error include the $33 billion SPDR Gold Shares ETF, one of the largest exchange-traded funds in the world.

“One could argue the role of NYSE official closing prices is one of the most important in the market,” Spencer Mindlin, an analyst at Aite Group, said by email. “Millions of portfolios and retirement accounts depend on the closing prices of NYSE-listed stocks and ETFs.”

Not knowing the closing price for a security can be a source of risk for traders, leaving fund managers unable to accurately tally the value of their holdings.

The error comes as NYSE still faces fallout from a separate technical error almost two years ago. Parent Intercontinental Exchange Inc. revealed last month that Securities and Exchange Commission investigators believed a 3 1/2-hour New York Stock Exchange outage on July 8, 2015, violated the law.

NYSE first reported it was investigating a technical issue at 4:07 p.m. on Monday, just minutes after the regular trading session ended. The bourse said in a later message to customers that ETF holders who wanted to be compensated for issues relating to the malfunction should submit their claims by 9:30 a.m. EDT on Tuesday. The company also said the underlying cause of the disruption had been identified and fixed.

NYSE Arca saw severe disruption to its market open in August 2015. While that wasn't caused by faulty technology, a later analysis by the U.S. Securities and Exchange Commission found that rules at the venue contributed to more than 1,000 trading halts in 327 exchange-traded products. In December, trading at the exchange was halted for 15 minutes because of a technical issue, though traders said the impact was minimal as orders flowed to other markets.

Mr. Mindlin said that glitches can have a competitive impact in a sector where Nasdaq Inc. and CBOE Holdings Inc. are battling for business. CBOE's Bats unit hired ETF executive Laura Morrison from NYSE, and in March 2016 bought ETF.com, a data and news provider for the industry.

“These consequences of outages like this highlight the importance of stable and trustworthy technology at the market venue where an ETF issuer chooses to list its products,” said Mr. Mindlin. “The marketplace for ETF listings is very competitive. Bats and Nasdaq have been attracting listings as fund providers look to diversify.”