Reuters: Regulatory News: Key US equity players urge SEC adopt abnormal trading controls

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Key US equity players urge SEC adopt abnormal trading controls Sep 28th 2012, 17:32 NEW YORK, Sept 28 | Fri Sep 28, 2012 1:32pm EDT NEW YORK, Sept 28 (Reuters) - Key players in the U.S. equity marketplace, including exchanges, brokerages and trading firms, called on U.S. regulators to set limits and track trading activity after a glitch caused Knight Capital Group to incur a $440 million loss this summer. A core nucleus of entities involved in the transaction of U.S. securities, including a clearing house and a watchdog agency for brokerages, urged on Friday that the Securities and Exchange Commission develop controls to better detect abnormal trading behavior in real-time. The so-called Industry Working Group of 16 brokerages and trading firms, along with five U.S. stock exchange operators and the Financial Industry Regulatory Authority, also urged the SEC to evaluate whether a longer-term consolidated control mechanism could be built at the Depository Trust & Clearing Corp. The group came together to address potential situations similar to the software glitch at Knight in August that wiped out much of its capital in just 45 minutes of errant trading and forced the market maker to seek new funding to avoid bankruptcy. The abnormally high order and trade volume at Knight did not trigger recently enacted controls such as single stock circuit breakers or clearly erroneous execution rules, and did not halt trading before significant harm was done, the group said. The group concluded that "supplemental controls" could help further mitigate any technology-related risks that either are not caught by broker-dealer risk management systems or that occur due to some other market event. The group said its recommendations are not meant to replace or ameliorate existing controls that broker-dealers are subject to. It cited the recently enacted Market Access Rule, existing supervisory responsibilities and any future regulations. The SEC has launched a broad review into technology issues at major brokerage firms, specifically looking at whether they have proper controls to address errors, people familiar with the matter said on Wednesday. {ID:nL1E8KQFE0] SEC staff has sent two batches of questionnaires to a sampling of brokerages asking for detailed information about their automated systems for order-taking and order processing, these people told Reuters. The SEC is convening a roundtable next week to discuss technology issues and how to prevent problems like the one experienced by Knight. One topic expected to be discussed is whether brokerages should be required to have "kill switches," a mechanism that could quickly shut down trading before problems spread. Link this Share this Digg this Email Reprints

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