Reuters: Regulatory News: UPDATE 1-U.S. regulators to require testing after trading glitches

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UPDATE 1-U.S. regulators to require testing after trading glitches Feb 19th 2013, 20:00 Tue Feb 19, 2013 3:00pm EST By Sarah N. Lynch and Emily Stephenson WASHINGTON Feb 19 (Reuters) - Exchanges and other trading platforms would have to perform tests to prevent software errors from unleashing havoc on the market under proposed rules being crafted by regulators, U.S. Securities and Exchange Commission Chairman Elisse Walter said. Walter offered details for the first time on the rules, which are being developed in response to a string of high-profile technology errors last year, in a speech Tuesday at American University's Washington College of Law. Those glitches include Nasdaq's botched handling of the Facebook initial public offering and Knight Capital's $440 million losses due to a software error. Walter's predecessor, former SEC Chairman Mary Schapiro, first announced last year she was putting the rule-writing process on the fast track, shortly after Knight Capital nearly went bankrupt. Walter said the rules will require exchanges, alternative trading systems and clearing agencies to provide notifications about systems disruptions and meet certain technological standards, as well as perform business continuity testing. "We saw how automated markets and computer-driven trading can go awry when technical issues in Knight Capital's trading and routing software caused it to erroneously establish positions in nearly 150 stocks, ultimately costing the company $440 million," Walter said. "But rather than just trying to reduce the impact of these disruptions, we're trying to eliminate the causes, by focusing on systems compliance and integrity," she said. The proposed rules being drafted at the SEC would essentially replace a long-time voluntary standard known as "automation review policies" or ARP. The SEC first developed ARP following the market crash of 1987. The ARP sets forth guidance for exchanges, some alternative trading systems and clearing agencies to help ensure their systems are stable, secure and have the capacity to deal with glitches that can send markets into a tailspin. In addition to converting the voluntary guidance into enforcement rules, the SEC is also considering whether to expand the program to apply to other entities, such as broker-dealers, advisers and dark pools. [ID nL1E8KE0YV] Walter did not provide an estimated timetable for when the proposal will be unveiled but said some of the details remain under discussion. The SEC has been exploring numerous possible market structure changes in response to the rise of automated trading. It implemented a handful of reforms after the May 6, 2010 "flash crash," when the Dow Jones industrial average plunged about 700 points before rebounding. Among the many market structure policy areas being explored by the SEC are high-frequency trading and its impact on investors. Link this Share this Digg this Email Reprints

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