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UPDATE 5-OTC markets stalled as Twitter soared

Rodrigo Campos and John McCrank
Thursday, 7 Nov 2013 | 8:28 PM ET

(New throughout, adds quotes from CEO, information on the trading halt, background on operational problems)

NEW YORK, Nov 7 (Reuters) - A lack of backup network connections and the frenzy around Twitter Inc's market debut contributed to a trading halt in 10,000 over-the-counter equities for most of Thursday, said OTC Markets Group, which runs the OTC trading platforms.

OTC halted activity on its alternative trading system at 9:28 a.m. EST (1428 GMT), and two hours later, the Financial Industry Regulatory Authority halted trading in all OTC equity securities "to protect investors and ensure a fair and orderly marketplace." Trading resumed at 3 p.m.

"What happened today, we are going to need to fix to retain the loyalty of our clients," Cromwell Coulson, OTC's chief executive, later said on a call with reporters.

The problems began just before 6 a.m., when Lightower Fiber Networks, one of OTC's network providers, had a network-wide outage. The outage affected OTC, as well as other OTC network providers, leaving some traders unable to connect to OTC, Coulson said.

As OTC moved to switch over from its primary data center, in Carlstadt, New Jersey, to its backup location outside of Philadelphia, some brokers, that would have had to make systems changes in order to make the switch, were hesitant, he said.

"Everyone wanted us to wait until Twitter opened, which slowed down our reaction. Nobody wanted to touch their systems to go to DR (disaster recovery) before that."

A CONTRAST IN MOODS

Twitter's market debut on the New York Stock Exchange was the most anticipated of the year, with shares of the seven-year-old company surging 73 percent from the initial public offering price of $26 set late on Wednesday.

As enthusiastic investors were trading Twitter shares, OTC was trying to get its systems back up. Unknown to Coulson, Lightower had bought Sidera Networks, another high-speed network provider, in April. Sidera was another of OTC's providers, and when one network went down the other had issues as well.

A representative from Lightower was not immediately available to comment.

Once the Twitter frenzy eased, some brokers were unable to make it into OTC's backup facility, further delaying the reopening, Coulson said. As those problems were being worked out, the network at OTC's primary site came back up and trading resumed shortly thereafter.

OTC issues include about 1,400 American Depositary Receipts and 1,400 foreign ordinaries, as well as government-backed mortgage companies Fannie Mae and Freddie Mac, and a host of micro-, small-, and mid-cap companies. Many securities on the over-the-counter market are illiquid, trading infrequently, with prices usually less than $1.

It was the longest-ever outage on the trading platform, and toward the end of the day, Coulson said the network was again "flickering." He said the OTC markets would open on Friday, but that it was unclear as to whether they would operate using the company's primary data facility or its backup site.

SQUIRRELS IN THE CABLES

Outages at electronic trading platforms have long been an issue. In 1987, a squirrel set off a power failure that shut down the Nasdaq for nearly an hour-and-a-half. Seven years later, another squirrel chewed through a power line, leading to another more than half hour outage at Nasdaq.

"It was our squirrel in the cable," said Coulson. "It was not something I expected would happen, because I thought we had a much better and robust network infrastructure."

He said that while OTC participated in the Securities Industry and Financial Markets Association annual business continuity planning testing, there were issues that came up on Thursday that were never noticed in testing.

He said aside from increasing backup connectivity, OTC would begin operating two-days-a-year out of its backup facilities.

"These are the kinds of mistakes where the industry will come out stronger and more resilient," he said.

A raft of technical glitches has affected U.S. equity markets in recent months and years.

In August, there was a three-hour halt in all Nasdaq-listed stocks and an issue at CBOE that suspended options trading in major U.S. options contracts that same month. Last year, a trading error that cost Knight Capital Group $461 million and led to the sale of the firm, now part of KCG Holdings.

(Reporting by Rodrigo Campos and John McCrank; Editing by Chizu Nomiyama, David Gregorio and Lisa Shumaker)