(Bloomberg) — Technology standards for U.S. stock exchanges are poised to get their first upgrade in more than two decades as securities regulators seek to prevent failures that have undermined investor confidence.
The Securities and Exchange Commission rules to be voted on today will cover the Nasdaq Stock Market, the New York Stock Exchange and venues operated by Bats Global Markets Inc., as well asdark poolsincluding those owned by Credit Suisse Group AG and UBS AG. They wont apply to wholesale brokers, such as Citigroup Global Markets Inc. and Citadel Securities LLC, that use technology to match orders away from exchanges.
Expanding it to other people deserves a really hard look and might be a good idea, but its important to go ahead with what people are ready to adopt now, said Elisse Walter, a former SEC chairman. To not have mandated technology standards really is a hole in the rule book.
The revisions will mark the first update in 23 years of voluntary technology standards issued after the October 1987 market crash known as Black Monday. The new rules would require coordinated tests to show exchanges can recover from natural disasters or terrorist acts, and regular reviews of backup systems.
SEC Chair Mary Jo White vowed to complete the new rules, known as Regulation SCI, after the August 2013 failure of Nasdaqs system for reporting quotes and prices, which caused a three-hour trading halt.
Knight Capital
Regulators considered applying the requirements to brokers after Knight Capital Group Inc.s $450 million trading loss in August 2012, which stemmed from a software error that caused the firm to enter millions of faulty trades in less than an hour. Knight, now part of KCG Holdings Inc., is one of several large market makers that pay discount brokers to fill retail orders.
Intercontinental Exchange Inc.s NYSE and SEC members Luis Aguilar and Kara Stein pushed for extending the requirements to the largest wholesalers, which execute more than 7 percent of shares traded, according to SEC estimates published last year.
It is important to us to compete on a level playing field, and these regulations ultimately need to protect that concept, Alex Albert, an ICE lobbyist, wrote in an e-mail to Aguilar in September that was made public by the agency.
Wholesale brokers maintain that their technology failures rarely affect the broader market. They also say that rules adopted in 2010 already require them to guard against erroneous orders and manipulative activity.
Significant Requirements
Exchanges have been more or less operating under these kind of standards, and its just not that way with broker- dealers, said Lanny Schwartz, a partner at Davis Polk & Wardwell LLP who was previously general counsel of the Philadelphia Stock Exchange. Regulation SCI is a whole other order of magnitude. It would be a significant additional set of requirements.
Its unclear whether Aguilar and Stein will vote for the rule. Aguilar has sought other changes, such as requiring an executive to certify compliance with Regulation SCI. He and Stein also wanted the rules to include a requirement to have an outside party periodically test for compliance, according to people familiar with the matter.
