By Suzanne McGee
(Reuters) - Trading platform Blue Ocean Technologies LLC on Monday completed a platform upgrade that will boost capacity several hundredfold, two weeks after its overnight trading system crashed in the midst of a global market sell-off, the company said.
The fix underscores the need for upgrades to cope with massive growth in retail overnight trading, especially as investors try to cope with or exploit market volatility triggered by geopolitical events, the uncertainty surrounding U.S. interest rates and election turbulence.
Privately-held Blue Ocean operates a U.S. alternative trading system, a platform that matches buyers and sellers, which underpins overnight trading for Robinhood Markets Inc (NASDAQ:HOOD) and 19 other U.S.-registered broker-dealers.
But its system was unable to cope with a surge of trading activity earlier this month, when disappointing U.S. jobs data and an unwinding of the yen-based carry trade triggered a global sell-off and a surge in volatility. That left Robinhood customers unable to place trades. The outage affected the last few hours of the Sunday/Monday overnight session.
"We had capacity issues," Brian Hyndman, Blue Ocean's chief executive, told Reuters in an interview last week. "We knew that the demand was coming late last year, based on the number of subscribers and marketmakers coming onto the platform.”
On Monday, it finished migrating to a technology system powered by Members Exchange (MEMX), a Wall Street-backed exchange launched in 2020, which will allow Blue Ocean to expand capacity dramatically.
That is measured in the number of trade-related messages -- from price quotes to confirmations -- that it will be able to handle. Hyndman said the upgraded platform will be able to handle 35 billion messages per 8-hour overnight trading session, up from 50 million.
Blue Ocean inked its technology deal with MEMX in January, but the transition did not happen swiftly enough to prevent its previous system from buckling during the Aug. 4-5 sell-off.
Hyndman said they knew the system's limitations and asked clients to scale back activity "because we knew it was going to be a big night. Still, the demand was much too high" he said.
Blue Ocean had to close its system shortly after 3 a.m. ET on Aug. 5 and later limited the number of securities its clients could trade.
Vladimir Tenev, CEO of Robinhood, described the events as "very frustrating" in an earnings call, but added he was confident that the technological upgrade would allow more overnight trading volumes.
FAST-GROWING OVERNIGHT TRADING
Overnight trading allows traders to place buy and sell orders in the 8 p.m. to 4 a.m. ET window between the end of U.S. market close and the opening of the next morning's pre-market on-exchange trading. That means overseas investors can trade during normal hours and U.S. investors can get an edge if big news breaks after hours.
While it is still a mostly retail-driven phenomenon and a fraction of total trading volume, overnight trading is growing fast.
Robinhood declined to disclose exact overnight trading volumes on its platform, but Tenev told analysts on an earnings conference call earlier this month it is approaching $30 billion daily, up from $10 billion in May 2023.
Interactive Brokers (NASDAQ:IBKR), which launched overnight trading in November 2022 and now offers overnight access to 10,000 different products, said in a press release that it saw a 446% surge in volumes in the first seven months of 2024 and that overnight trades now account for 2.5% of all U.S. trading volumes.
Steve Cohen-backed Bermuda-based trading platform 24Exchange is also seeking regulatory approval to offer 24/7 trading in U.S. stocks.