SEC WRAP: A Collection of SEC Roundtable Coverage
Traders Magazine Online News, October 3, 2012
“We don’t want a problem at a single firm to become a market problem,” he said.
Citadel has its own product, Fusebox, which sits outside its trading system and can act as a sort of kill-switch.
The Fusebox halts trading when Citadel’s systems get overloaded, similar to the way an overloaded fusebox in a home works.
Want to Fix a System? Break It First
Want to see what happens to your trading desk or matching engines when you shut down a part of the electronic systems that support them? Try it.
That, in effect, is what the U.S. equities industry’s post-trade processing utility, the Depository Trust and Clearing Corp., does. At the Securities and Exchange Commission’s Market Technology Roundtable Tuesday, DTCC managing director and chief development officer Albert Gambale detailed a tactic his firm routinely uses to test its systems.
The clearer selects a branch office and has it halt operations and stand-down to see how the rest of the company’s nationwide system handles the shut-down.
Such testing of how well a system can keep working without one of its parts in place could have helped, for instance, Knight Capital on August 1 when it unleashed its flood of erroneous orders onto stock exchanges. Shutting down the misfiring part, in theory, would not necessarily have meant shutting down all its market making operations.
Crisis preparation such as these shutdowns and the tests that go with them are important because in the moment of crisis responsive actions must be handled with "military precision,'' according to Saro Jahani, Chief Information Officer of Direct Edge, operators of the EDGA and EDGX exchanges. “Often, there is no time to find the absolute best person to handle it—rather, you have to focus on doing the right thing for the market.”
Direct Edge has its own experience with this type of crisis. Last October, the SEC cited Direct Edge for two system failures that allegedly caused millions of dollars in trading losses.
The first incident occurred in November 2010 when untested computer code changes caused the two exchanges to overfill orders. The unwanted trades involved an estimated 27 million shares in about 1,000 stocks, totaling roughly $773 million.
A second incident occurred in April 2011 when an exchange employee accidentally disabled database connections and disrupted the exchange’s ability to process orders and cancellations. EDGX members filed claims for more than $668,000 in losses.
Following the SEC’s citation, Direct Edge undertook "a comprehensive plan" of regulatory compliance, which included significant investments in technology and personnel, to harden its systems. Indeed, yesterday Direct Edge partnered with software tester Coverity, Inc., to improve how it tests software before it gets used by its exchanges. The “Edgile’’ approach automatically tests code and identifies issues as code is being written.
Dr. M. Lynne Markus, Professor of Information and Process Management at Bentley University in Waltham, Mass., outlined four basic elements that exchanges and trading firms should follow, to prevent glitches or limit their impact.
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