April 1, 2013

SEC Pushes Anti-Glitch Regulation

By Tom Steinert-Threlkeld

The Securities and Exchange Commission has proposed new rules designed to protect against the kinds of technical disruptions that plagued stock exchanges last year.

Members of the commission voted unanimously to require stock exchanges and certain alternative trading systems to "carefully design, develop, test, maintain, and surveil systems that are integral to their operations.'' They also would have to provide notification of disruptions to their systems.

Elisse Walter, SEC

The set of rules, called Regulation Systems, Compliance and Integrity, comes after three well-publicized events disrupted national stock exchanges last year. These included the flawed initial offering of stock for Facebook on the Nasdaq Stock Market, the initial offering of stock from exchange operator BATS Global Market botched by BATS itself, and the flood of erroneous orders that spewed onto the nation's exchanges from market maker Knight Capital on August 1.

Reg SCI would replace the current voluntary program for maintaining system integrity, with enforceable rules, chairman Elisse B. Walter said.

Under the proposed rules, the systems underlying national exchanges and ATS's whose volume passes a stated threshold would have to meet specified technical standards and undergo testing that showed the exchanges could continue to operate, when the systems underwent stress. Some clearing agencies also would have to follow Reg SCI rules.

Firms would have to conduct an annual review of compliance with Reg SCI and submit an annual report to their own senior management, as well as the SEC. SEC staff also would get access to the venues' core systems, in order to assess compliance with Reg SCI.

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