Regulators are said to be scrutinized the trading systems used by U.S. stock exchanges as a result of several technology breakdowns that occurred over the past year.
According to an article in today’s Wall Street Journal, the Securities and Exchange Commission is looking to set standards for trading systems that will give the agency the authority to intervene when problems flare up.
The regulatory body is focusing on technology in the wake of the May 2010 ‘flash crash’ which illustrated how interdependent electronic trading platforms can impact one another. Also, over the past year, exchanges run by Nasdaq OMX Group and Direct Edge have had technical glitches that forced them to reimburse investors for millions of dollars of losses. The article notes that minor server outages, such as the one impacting trading data for some stocks on the New York Stock Exchange this week, are more typical.
As the article notes, exchanges are spending hundreds of millions of dollars to build state-of-the-art data centers, hardware and networks to capture the business of high frequency traders. But are they focusing on speed at the expense of stability?
On the other hand, the current guidelines adhered to by exchanges and automated trading systems for maintaining computer operations, telecommunications networks, data security and back up systems in case of disaster, may not be up-to-date, the article suggests.
These guidelines were set by the SEC in the 1980s, reports the Wall Street Journal, which points out that these guidelines are “voluntary” though the exchanges treat then as rules, contend exchange officials who are not identified in the article.
As a consequence of their voluntary nature, and the reality that trading is so sophisticated today, regulators find these guidelines difficult to enforce, and would prefer to have a rule on the books. The idea is to lay out clear standards for the 13 U.S. stock exchanges and smaller trading venues (i.e. 40 dark pools) that span the market and run on different technologies. The rules may have the support of Democratic and Republican members of the Commission.
The article points out that exchanges feel the current guidelines provide flexibility and have worked for more than two decades including the evolution of electronic trading.
But, strict rules or standards may not be necessary because the primary motivator for avoiding outages is competition. If the exchanges don’t maintain their systems, or suffer repeated glitches, they will simply lose business and force their customers to route to another venue. The "reputational hit" may be all that exchanges need to maintain their technology, Sang Lee, Aite Group managing partner, tells the Wall Street Journal.