When it comes to reliability of their systems, Euronext isn’t exactly the bank of Switzerland. Every once and a while the market is shut down or having a delayed opening – their thousands of employees can’t get the exchange work like.. well.. Eurex. Most recent challenge is broadcasting the index level, the AEX. Apart from the talking heads on television nobody really cares, as the future is usually trading and a better indication of where the market is heading.

Settlement price of weekly AEX options

Until last Friday. Last friday there was an expiration of the weekly index options, the AX5. Yes, it was the fifth friday of the month, hence the name. These popular options are cash settled at the EDSP, the Exchange Delivery Settlement Price. This is the average of 31 AEX index ticks every minute between 15:30 and 16:00.

Apparently, the rats in the basement of Euronext had a celebration party again and had a few wires for lunch. The exchange didn’t have a clue what the AEX was doing. Not really a problem, the market knows after all. The future was trading around 325.5 points, and at a discount of 1.25 index point. The expiration level would have been approximately 327.

Problem persists

However, Euronext couldn’t broadcast the AEX levels and couldn’t calculate the level. That’s clumsy, especially when there are millions at stake. What to do? Estimate the expiration level? After an hour of discussion the boys and girls at Euronext decided to send everyone an email:

“NYSE Euronext would like to remind clients that all missing index levels between 15:24:45 and 17:08:00 will not be rebroadcast nor recalculated. “

They could not fix the problem. Which is strange because even my grandmother could calculate the index level when you would give her the tick by tick trading information of the underlying 26 stocks. Available in Bloomberg. Anyway, no solution yet. Some genius at Euronext must have come up with a magnificent idea.

Let’s extent the maturity of these AX5 options until the close of the day at 17:30, and not tell anybody about it!“.

Solution

That’s what the professionals at Euronext did. The market was up two points from the official expiration period. The options were closed since 16:00 as usual. But the positions were still there, including the risks. Nobody knew the worthless out-of-the-money calls with strike price of 328 and 329 suddenly were getting valuable. During the expiration period these calls were offered at 5 cent and valued at zero. Nobody knew the settlement price would be set hours later and two points higher at 329,17.

All involved market makers, traders and investors are either heavily fucked or pocket a lot of money by accident. When Euronext is feeling free to adjust basic contract specifications, nobody is safe anymore. This risk can’t be hedged. You tell ‘m, Walter.

What a mess. Amateurs.

Jack
Jack