SEC makes US exchanges test trading systems


US exchanges will have to carry out routine testing on trading systems, after new rules were agreed by the Securities and Exchange Commission (SEC) aimed at toughening the technology infrastructure of the US securities markets.

Comprising Regulation Systems Compliance and Integrity (Regulation SCI), the rules mean exchanges also have to notify the SEC about problems, including those relating to cybersecurity.

SEC chair Mary Jo White described the changes, which take effect in January 2015, as a “historic shift”.

She said: “The rules provide greater accountability for those responsible for our critical market systems, helping ensure that such systems operate effectively and that any issues are promptly corrected and communicated to market participants and the commission.”

It means self-regulatory organisations, alternative trading systems (ATSs), plan processors, and certain exempt clearing agencies will need to have comprehensive policies and procedures for their technological systems; conduct business continuity testing; and carry out annual reviews of their automated systems.

They will also have to quickly fix the problems when they happen and provide updates to the SEC about any system problems or changes. Exchanges will have to make sure market participants are fully aware of any issues.

“Failures must be minimized and, when they occur, they must be remediated as quickly as possible and promptly reported,” White said. “Investors should expect no less of the world’s premier securities markets — indeed, investor confidence depends on it.”

Recent technology problems in markets - notably the flash crash of May 6, 2010 - have demonstrated the risks involved with trading system failures. The Dow’s spectacular collapse that day has rocked confidence in trading systems and have since been compounded by incidents like the technical fault that delayed Facebook’s entry on the Nasdaq in 2012.

At the heart of these changes is the rise in high frequency trading. As the SEC notes, because of the “heavy reliance on technology and automated systems in the securities markets today”, the impact of technology failures on markets and investors “can be significant”.

In a sense the regulations are part of a wider clampdown on the influence of algos on the market. Earlier this year the SEC announced fresh measures to limit aggressive short-term trading tactics during periods of high volatility.