November 01, 2012

The SEC also could require a securities registration for a quality assurance position; that would give the role a compliance status and drive up salaries, thus attracting people with more market knowledge. The SEC also could look to register algo providers to monitor their strategies, but the industry would fight that. "For agency brokerage firms writing algorithms, registration and auditing that would be a huge cost," Sudhanshu Arya, managing director at Investment Technology Group, said at the roundtable. "I think monitoring that would be hugely expensive."

The SEC also could develop a common testing standard. That would be tricky, though, since firms handle testing differently. "Where you could arrive at a standard is in the ability to shut off the technology or raise alerts," Cook said. "Some of the control functions that are in the technology could become a standard."

[Flash Crashes, Kill Switches, and 10 Million Easy Buttons]

Industry Leaders: Exchanges, including NYSE, Nasdaq, BATS Global Markets and Direct Edge, conduct extensive testing for software, such as new matching engines and trading platforms, they release to the market. If the SEC were to implement mandatory testing or any common deployment rules, they would affect any broker that develops algorithms and provides direct-market access to exchanges, in addition to automated market makers, such as Getco and Citadel, among others.

Price Tag: When it comes to developing and implementing a standard testing approach, it's not clear how much it would cost. There could be costs for staff, development and third-party tools. If firms take a consortium approach, they could develop some shared standards and "that could ease the burden," Cook said.

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Ivy is Editor-at-Large for Advanced Trading and Wall Street & Technology. Ivy is responsible for writing in-depth feature articles, daily blogs and news articles with a focus on automated trading in ...