SEC Proposes Solutions to Trading Glitches

SEC Proposes Solutions to Trading Glitches

The Securities and Exchange Commission’s (SEC) proposal for solutions to major trading glitches on Wall Street was approved unanimously on Thursday. The Wall Street Journal indicates that the SEC’s proposal is a step toward preventing random computer glitches that disrupt markets, while also imposing standards for the electronic architecture of private trading venues known as dark pools.

Dark Pool Trading

The SEC’s proposal would enhance efforts to safeguard exchanges and clearinghouses that have been maintained on a voluntary basis since the 1987 stock-market crash. The plan would implement mandatory safeguards for the first time, and extend them to dark pool trading activities in the market or a single stock.

The largest dark pools are operated by Goldman Sachs Group Inc., Barclays PLC., and Credit Suisse Group, and if the rules are passed, this could increase the SEC’s scrutiny of dark-trading venues because the proposal subjects dark-pool computer systems to agency inspections.

Currently, there are already a few rules in place for dark pools, but much of the day-to-day supervision is left to the Financial Industry Regulatory Authority.

The SEC’s Proposal

The proposal comes after a series of computer malfunctions have disrupted markets since the 2010 ‘flash crash’ when hundreds of stocks plunged at once. Last fall, during superstorm Sandy, the market shut down — which raised questions about disaster preparedness plans for exchanges.

Many exchange officials support the SEC proposal, stating how the new rules could offer more clarity to market participants. SEC Chairman Elisse Walter told Reuters:

While it is not possible to prevent every technological error each market participant may commit, as the overseer of our securities markets, it is the commission’s responsibility to ensure that our regulations are designed to minimize their impact on our markets and ultimately investors.

Despite the detailed plans, others remain skeptical of how the changes would mandate compliance with a clear set of standards, since the SEC’s proposal only offers a set of model policies. SEC Commissioner Luis Aguilar told Reuters:

An unprecedented safe harbor in a rule that does not require clear, identifiable, and meaningful standards, and that does not require policies and procedures to be reviewed by an independent third party and certified by senior officers, will result in a rule proposal that falls short of its goal.

Aguilar indicated that he did not like how the plan provides a ‘safe harbor’ that would protect firms their employees, as long as they create policies that are reasonably designed to comply with the rules.

The SEC’s proposal would apply to an estimated 44 different exchanges including clearinghouses, dark pools and other market participants — requiring these entities to comply with technology standards for computer architecture, testing backup systems, creating a yearly disaster recovery plan, and notifying the SEC during any systems disruptions.

The vote opens a 50-day period of public comment that is followed by a second vote before the rules are final.

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About The Author


Felix Shipkevich

Felix Shipkevich

Mr. Shipkevich’s practice focuses on regulatory, transactional, and enforcement matters in the fields of futures, commodities, and derivatives. He works with Futures Commission Merchants (FCMs), Retail Forex Exchange Dealers (RFEDs), Introducing Brokers (IBs), Commodity Pool Operators (CPOs), Commodity Trading Advisors (CTAs), Swap Dealers (SDs), Swap Execution Facilities (SEFs), and domestic and offshore hedge funds. Mr. Shipkevich guides clients on procedures related to registration with the U.S. Commodity Futures Trading Commission (CFTC) and the National Futures Association (NFA), as well as domestic and international regulators in local jurisdictions. Mr. Shipkevich prepares and helps implement compliance, anti-money laundering (AML), and Electronic Trading Systems (ETS) procedures for clients in the commodities and derivatives fields.

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