The U.S. Securities and Exchange Commission is writing new rules in the wake of Knight Capital Group Inc. (KCG:US) losses that could turn longstanding policies for how exchanges manage their automated systems into regulations.
After Knight suffered a $440 million trading loss Aug. 1 that almost put it out of business, the SEC began work to bolster existing policies meant to ensure the exchanges’ systems can safely handle trading demands, according to a person familiar with the SEC’s work who spoke on condition of anonymity because the process isn’t public.
SEC Chairman Mary Schapiro said in an Aug. 3 statement that she asked her staff to hasten work “to require exchanges and other market centers to have specific programs in place to ensure the capacity and integrity of their systems.” The agency expects to hold a public meeting with industry participants next month to talk about ways the SEC can better oversee trading technology, the person said.
The malfunction at Knight tripped safeguards previously put into place by the SEC after the one-day May 6, 2010, market crash also caused by technical faults, including activating single-stock circuit breakers to halt trading. Schapiro pointed out her agency’s recent market-access rules already require broker-dealers to keep tabs on their own trading systems “to ensure they are operating properly.”
The SEC’s so-called automation review policies with the exchanges, put in place after the 1987 market crash, require the exchanges to notify the regulator of trading failures or security lapses. Portions of those policies will serve as the basis for the new rules, the person said.
Schapiro said in a March 2011 speech that the policies with exchanges should be made mandatory.
“Such a regulation would require market participants to meet adequate standards for the capacity, resiliency, and security of their automated systems,” she said. “These rules could apply to exchanges, alternative trading systems handling appreciable volume, clearing agencies, depositories and securities information processors.”
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