The Securities and Exchange Commission is preparing to push ahead on a policy initiative Reg SCI, in an effort to limit the type of technical disruptions and trading glitches that have plagued equities markets since the May 2010 flash crash.
Chairman Elisse B. Walter speaking at the annual “SEC Speaks” conference on Friday said the agency was moving ahead with formulating and drafting Reg SCI, which stands for systems compliance and integrity.
Once drafted, Reg SCI will be proposed and put up for public comment, Walter said. But she said there was no set timeline for this process.
If passed, the new rule would mandate that all exchanges, alternate trading platforms and clearing firms routinely test their technology for any security or technical problems. The testing would also have to meet systems integrity standards that would ensure the stability of the entire trading market.
The rule would also require participating exchanges to test how their systems respond to problems—like glitches or outages—and notify the SEC if or when they suffer any disruptions.
The new regulation comes after a year of glitches in which both BATS Global Markets and the Nasdaq Stock Market botched highly visible initial offerings of stock to the public and market maker Knight Capital Group nearly self-destructed when a software bug led it to flood markets with erroneous orders at the start of trading August 1.
Rule SCI would be modeled after the policy it would effectively replace, the Automation Review Policy (ARP), which was created in the wake of stock market crash of October 1987. Under the ARP, exchanges voluntarily agreed to periodic SEC inspections of their systems and to follow SEC guidance on compliance.
The SEC also is putting into effect two sets of limits on stock price movements.
First, on April 8, the SEC will put into practice the “limit up/limit down” mechanism that was first proposed in April 2011, Division of Trading and Markets associate director David Shillman said.
The new mechanism will be established on the most liquid stocks, and will prohibit trading in these stocks outside a proscribed, historical price range.
The “limit up/limit down” mechanism will replace the current, individual stock circuit breakers, which were established shortly after the flash crash of May 6, 2010.
Although the “limit up/limit down” mechanisms are similar to circuit breakers—which Shillman said had “worked reasonably well”—the new restrictions would be more efficient and allow for greater focus and control.
Second, also on April 8, the SEC will roll out newly refined market-wide circuit breakers, which would halt trading across all markets if triggered.
The upgraded market-wide circuit breakers will feature, among other points, i) a reduced market decline percentage thresholds necessary to trigger the circuit breaker; ii) a shorter duration of trading halts; and iii) a change in the reference index—to the broader Standard & Poor’s 500 from the Dow Jones Average—that’s used to measure a market decline.
The new parameters in the upgraded market-wide circuit breaker rules replace the previous trigger mechanisms, which were established in October 1988. Critics contend the old standards have become too outdated in the modern electronic marketplace, noting that they’ve only been triggered once in the past 25 years.
Both the limit up/limit down and market-wide circuit breaker initiatives will be in a pilot program for one year to allow for analysis of their effectiveness, Shillman said.
