BATS: Pre-Testing Algos Makes Sense
Traders Magazine Online News, October 1, 2012
The operator of two national exchanges said that complex algorithms as well as new types of trading orders should be rolled out in stages, to avoid disrupting markets when launched.
On the eve of the convening of two industry roundtables on repeated technical errors in stock markets being convened by the Securities and Exchange Commission, BATS Global Markets told the federal regulator that “before a broker-dealer launches a new algorithm or a trading center introduces a new order type, the broker-dealer or trading center should ensure that there has been adequate user acceptance testing and experience with the new code or order type in a certification environment.”
The length of time for such testing should vary, based on the complexity of the new code or the order type, BATS said in a comment letter signed by general counsel Eric Swanson.
BATS, in its letter, noted that a fault in “a single line of code” caused its own matching engine to go into an infinite loop earlier this year, causing the initial offering of its own stock to fail on its own market and on its own technology.
BATS, in its letter, said “complex trading algorithms and order types should be subject to staged rollouts into live symbols where possible.” Staging rollouts, it said, would help identify problems “before they cause catastrophic impact.”
BATS also recommended using “test” symbols in production environments, rather than actual stock stymobls, to test new codes and order types, as another means of limiting or avoiding disruptions, before they occur.
BATS also said “monitoring can be built into automated systems to alert operations personnel at the first indication of an unresponsive, or “looping,” process” to ensure a timely response
The letter was submitted in advance of Tuesday’s SEC roundtable on market stability, called after waves of erroneous orders from market maker Knight Capital flooded national exchanges on August 1.
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