SEC presses exchanges on changes to prevent technical glitches

SEC presses exchanges on changes to prevent technical glitches

on Sep 19, 13 • by Chris Bubinas • with No Comments

On September 19, the Securities and Exchange Commission convened a meeting of regulators and exchange executives to address the growing incidence of such errors. Stock and options exchanges have 60 days to deliver plans for improving their management of technology problems...

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The increased automation of stock exchanges and trading technologies has prompted concerns about the reliability of various markets, particularly in the wake of numerous glitches that have halted trading in recent months. Investors are wary and their confidence is wavering, according to many in the industry. And regulators are paying attention. On September 19, the Securities and Exchange Commission convened a meeting of regulators and exchange executives to address the growing incidence of such errors. Stock and options exchanges have 60 days to deliver plans for improving their management of technology problems, The Wall Street Journal reported.

SEC officials met with executives from exchanges including Nasdaq, NYSE Euronext, BATS Global Markets and Direct Edge Holdings, according to the Wall Street Journal. Regulators underscored the economic danger posed by technology glitches and asked exchanges to work with market players to come up with “comprehensive action plans” to shore up the resilience of data feeds and other critical systems. The meeting was prompted in response to an August incident in which an error with a data feed managed by Nasdaq OMX halted trading for more than 2,700 securities for several hours.

“The orderly functioning…and the robustness of our market infrastructure are vitally important to our nation’s economy,” SEC Chairman Mary Jo White said, according to the Wall Street Journal.

Maintaining investor confidence
Concerns about the reliability and safety of markets due to automation has grown in recent years, particularly with several high-profile glitches among both brokers’ and exchanges’ systems that either disrupted trading or set off unexpected market behaviors. In recent months, Nasdaq was given the largest SEC fine ever due to glitches that halted trading during the Facebook IPO last May, while a recent error at Goldman Sachs prompted a flood of erroneous options sales.

Industry insiders also recently reported that exchanges are now using the danger of bugs as a point of competition in fighting for potential IPOs. Such problems appear to be harming investor confidence. A recent blog post from analysis firm Trefis noted that “no particular exchange can be regarded as especially immune from technological issues” and suggested that trading, which has been depressed by broader macroeconomic trends, could continue to suffer until exchanges devise better solutions or investors simply learn to live with problems.

“Being unable to exit a position when desired is a big turn-off for investors, and recurring software glitches make doing so even tougher,” the firm noted. “Frequent shutdowns also act as a reminder that markets are not yet completely safe.”

Improving the trading environment
In March, the SEC proposed a new set of rules standardizing maintenance and testing for trading systems, but brokers and exchanges have protested potential implications of the changes. Nonetheless, the industry appears open to making adjustments that will help increase reliability of computer systems and the health of markets.

Among the topics stressed by the SEC at this meeting were ways that the data feeds that report trades, known as Securities Information Processors, could be strengthened, the Wall Street Journal reported. The August Nasdaq error was the result of an issue with the software that operates its SIP system. Other requests on the SEC’s part were that exchange operators develop a uniform plan to reopen markets in the wake of a trading shutdown and that exchanges speed up proposals for instituting “kill switches” that can quickly shut down trading if something goes wrong.

One step that will be important as exchanges prepare proposals for the SEC and look for ways to mitigate system errors in advance of potential regulatory changes will be to ensure that the software underpinning these systems does not contain flaws. Whether regulatory pressure institutes new coding standards or not, exchanges and brokerages can improve the safety of automated trading functions by using tools like static analysis software to scan for errors in code. Requiring the application of automated analysis or manual code review to new trading system software could be a valuable step in reducing problems and exchange downtime.

Software news brought to you by Klocwork Inc., dedicated to helping software developers create better code with every keystroke.

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