BLOG: SEC to Exchanges: Straighten Out Your IT – Or Else

The Securities & Exchange Commission met with the heads of the top U.S. stock exchanges on Thursday morning to discuss the recent spate of trading glitches and system outages that have plagued investment firms and exchanges. The exchange operators also got some marching orders: Fortify your trading systems.

This unprecedented meeting – where the vulnerabilities of electronic trading were discussed with the new head of the SEC Mary Jo White – was inspired by the “Flash Freeze” that stopped trading on Nasdaq in mid-August.

According to news reports, White and her SEC team wanted assurances that the IT systems used by the exchanges was properly tested and had adequate redundancies and so-called “fail-over” plans. 

Bloomberg reports that White ordered the heads of equity exchanges to work together on a set of recommendations that will strengthen the resiliency of U.S. markets.

“Our homework assignments are clear, they require collaboration and we’ve got 60 days,” said NYSE Euronext CEO Duncan Niederauer after the meeting with SEC’s White.

As it usually happens in these cases, the heads of the exchanges lauded the regulators’ mission while subtly pushing back on any plans to increase their regulatory oversight.

A statement from Robert Greifeld, CEO of NASDAQ OMX, reads:


“Today’s meeting organized by the SEC was an important and constructive step forward to address the soundness and reliability of critical infrastructure underpinning the U.S. capital markets. The recommendations discussed today with regulators and key industry participants are designed to accomplish three overarching objectives: to improve the operational resiliency of our markets, strengthen interoperability standards between exchanges and market participants, and establish a clear governance and testing framework for the industry.” 


NASDAQ has the responsibility as a market leader to take all necessary steps to ensure the integrity and reliability of the markets, and we intend to continue to do so in a highly collaborative way with the other exchanges as well as our regulators, recognizing that investor confidence is the cornerstone of a healthy market.”


But not all was good cheer. The OTCMarkets, for one, issued a statement that pushes back against Regulation SCI, the SEC’s new proposal for improved “Systems Compliance & Integrity.”


“The staggering breadth of Reg. SCI, combined with the ambiguous language in the proposing release would immediately impose severe burdens on “SCI Entities,” as that term is defined in the regulation. The effect which would be felt by their members, subscribers and ultimately investors, who would be left to bear higher costs while receiving lower quality services. The organizations that should be focused on the consistent improvement required to keep the U.S. at the forefront of financial market structure would instead be stifled by monumental new reporting requirements. Raising the regulatory burden and resources required for systems change will reduce the industry’s capacity for technological innovation, causing the long term global leadership and efficiency of U.S. markets to suffer.”


Ah, another regulatory proposal followed by push-back from the financial firms who would really like to, you know, pass.

But as Harvey Pitt, a former head of the SEC, told CNBC earlier today, the regulatory body could always deploy the “nuclear bomb” and dismiss a head of a stock exchange or two. It has that power after all, he says.

Your move, exchanges.