Comment Period for Automated Systems Rule Extended 45 Days

The Securities and Exchange Commission has extended the period for commenting on its proposed standard for the maintenance of automated systems used in securities trading by 45 days.

The federal regulator pushed back the due date for all comments on its proposed Regulation Systems Compliance and Integrity to July 8, from May 24.

The extra month-and-a-half is half the amount of additional time requested by the securities trading industry as well as one U.S. senator.

On May 10, seventeen national exchanges, including the Nasdaq Stock Market, the New York Stock Exchange, all other national stock markets as well as options markets and the Financial Industry Regulatory Authority, asked for an extension until August 22, to respond to the 200 questions posed by the SEC in the March 25 proposal. On May 17, U.S. Senator Mike Crapo (R-Idaho) also requested a 90-day extension.

The proposed regulation applies to national exchanges, alternative trading systems, certain clearing agencies and data processors, but not directly to market makers or broker-dealers.

The regulation sets standards for maintaining and annually testing automated systems that support regulated trading activities.

“This extension will allow for 105 days of comment, which the Commission believes should provide the public with sufficient additional time to consider thoroughly the matters addressed by proposed Regulation SCI and to submit comprehensive responses,’’ the commission said Monday, in extending the comment period.

As of May 9, only eight comments had come in to the SEC – and only one, from technology consultancy Tellefsen & Co., had substantive analysis. Most comments since that date were requests for extensions of the comment period.

Among the criticisms most widely voiced in the first weeks after the regulation was proposed by then-SEC chairman Elisse B. Walter was a lack of clear definition of what constituted materiality in the “material changes” in computer systems being made that must be reported to the agency

Also at issue was how widely the regulation should be applied. As proposed, Reg SCI would apply only to “self-regulatory organizations” such as the Financial Industry Regulatory Authority, the New York Stock Exchange and other national exchanges, alternative trading systems of a certain size, the Municipal Securities Rulemaking Board and two “plan processors” that provide market data to investors. These are NYSE Euronext’s Securities Industry Automation Corporation and a unit of Nasdaq OMX Group.

“We think it will be more equitable if this rule also applied to market makers and broker-dealers that are active in the market,’’ Howard Meyerson, general counsel at Liquidnet, told Traders Magazine.

Liquidnet is an alternative trading system that handles anonymous trading in large blocks of shares for institutions and would be affected by the regulation.

The regulation does not cover, in its current iteration, market makers or broker-dealers. But the SEC left that open, asking the industry, in one of its requests for comment if they should be included.

The exclusion was clear when Walter announced the regulation in February and linked it to the “the May 6 flash crash, systems issues that arose during the IPOs of Facebook and BATS Global Markets, the hacking of Nasdaq’s systems, and the closing of U.S. markets in response to Superstorm Sandy,’’ which, she said, “all exemplify the types of problems and disruptions that can affect our marketplace.”

She did not mention the disruption of the first hour of trading in August 1, 2012, when a faulty piece of code led market maker Knight Capital Group to unleash a flood of erroneous orders onto national exchanges. Knight lost more than $450 million in about 45 minutes and ended up selling itself to fellow market maker GETCO, in order to survive the fallout of the mishap.