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SEC Report Zeros in on Systems Capacity

SEC November report addresses online trading capacity issues.

Securities and Exchange Commissioner Laura Unger released a report in November on online trading that makes recommendations to regulators as to how they should treat systems capacity issues-among other issues faced by online trading firms. The report found that online trading firms vary in their approach to and disclosure of their systems capacity. "Based on the number of customer complaints involving systems issues, customers expectations regarding systems capacity are not always in-line with the disclosures that firms make in new account forms, customer agreements and other documents," the report finds.

As a result, Unger suggests that firms disclose periodic systems failures in plain English to alleviate inflated expectations. She also concludes that if a brokerage firm has a systems failure, it should provide sufficient back-up methods for order entry and execution and make customers aware of these alternative methods. Furthermore, brokerage firms should inform their customers of the full extent of the problem and its expected duration. These firms should "maintain the ability to route orders to multiple market centers to provide alternatives for the execution of a customer's order in the event that the preferred market center for execution is not functioning." The firm should also undergo contingency planning to detect and solve systems-related problems before they become bigger problems.

In the report the SEC recommends the Commission should consider requiring all firms to keep records of significant outages and consider advising firms on how often they should test their systems. The report also suggests that online trading firms regularly subject their systems to rigorous stress tests. Furthermore, the Commission should consider reproposing the operational capacity rule and require all firms to inform new customers of potential systems delays and outages in new account documentation.

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