SEC Tackles Trading System Glitches

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[author: Michael W. Robinson]

It’s said that once is happenstance; twice is coincidence; and three times is enemy action. With investors reeling from a series of trading technology glitches that have cost hundreds of millions of dollars, the U.S. Securities and Exchange Commission (SEC) is embracing this wisdom – originally uttered in Ian Fleming’s Bond classic Goldfingerby taking steps to ensure that a sputtering economic recovery isn’t further impeded by those pesky ones and zeroes that facilitate securities transactions today.
 
On August 1st, trading system failures that caused the Flash Crash of 2010 and were part of Facebook’s IPO debacle struck again with similar problems at Knight Capital’s market-making unit, which executes close to ten percent of all trading in U.S. stocks. The glitches cost $440 million and resulted in Knight’s desperate search for a capital injection As a result, the SEC is proposing a new set of regulations that would build on automation review policies enacted after the crash of 1987. These new rules would require, among other things, that trading firms disclose system failures and test coding changes before they go live.
 
According to SEC Chairman Mary Schapiro, the goal is “to require exchanges and other market centers to have specific programs in place to ensure the capacity and integrity of their systems.” That’s precisely what you would expect from an SEC that continues to successfully burnish its investor confidence and protection credentials. The Commission has recognized that automation isn’t going away and is proactively taking steps to ensure that this underlying infrastructure is well positioned to lead to an efficient and orderly marketplace.
 
Simply put, the SEC is sending the right message. Now it’s time for market makers and participants to do the same.
 
In the present context, that means more than simply reporting problems when they arise. Markets and trading firms now have an opportunity to articulate the many ways in which they go beyond compliance to ensure that every trade is executed as ordered. While certainly a step in the right direction, the private sector has a role to play in this recovery as well. Indeed, it will take just such collective efforts to restore fundamental trust in the marketplace.
 
Michael W. Robinson is an Executive Vice President at LEVICK and a contributing author to LEVICK Daily.

 

Published In: Administrative Agency Updates, Finance & Banking Updates, Science, Computers & Technology Updates, Securities Updates

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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