NYSE Regulation, the regulatory arm of NYSE Euronext, is stepping up its scrutiny of brokerages’ algorithm development, marketing and supervision processes.
At an industry conference in September, John Malitzis, an NYSE Regulation vice president in charge of market surveillance, told attendees the regulator is taking a hard look at how much firms involve their compliance and legal professionals when deploying algorithms.
NYSE Regulation is worried that firms are throwing algorithms into the market without enough oversight. "We’ve seen a number of instances where algos have gone wild," Malitzis told the crowd at the Investment Company Institute’s capital markets conference. "When we call up a firm to find out what is going on, they can’t tell us."
A stock price that shoots up suddenly on several times its average daily volume, for example, would cause the regulator to question the firm, Malitzis explained.
"The weakness we’ve seen is that when firms throw an algorithm out, there’s really little oversight beyond that," Malitzis said.
NYSE Regulation is not the first regulatory authority to broach the issue of errant algos. In March, an official of the Securities and Exchange Commission warned attendees at a trading conference to involve their compliance departments when building new trading systems. (See "SEC Warns Industry on Trading Systems Development" on TradersMagazine.com.)
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