SEC Proposes New Exchange Tests to Prevent Tech Breakdowns

The Securities and Exchange Commission (SEC) is striving to limit and prevent technology breakdowns at at venues handling stock, options and bond trades, by proposing a new rule to prevent malfunctions that could harm markets.

Bloomberg reports that for the first time, U.S. exchanges and brokers will be required to conduct coordinated trading tests to demonstrate their ability to recover from national disasters or terrorist attacks.

The mandate, which is also called Regulation Systems Compliance and Integrity, instructs exchanges to strengthen their technology and guide member firms to participate in tests to show they are able to sustain operations after a large disruption.

The rule, which was published last month, covers testing, disaster preparedness and software development, and will govern 44 firms and 17 exchanges. Regulators wrote the rule, known as REG SCI after the May 2010 flash crash, when the Dow Jones plunged 9.2 percent before recovering.

The SEC has estimated that their organization needs the staff and resources to apply the rule uniformly — and initial compliance costs for the organizations subject to the regulation, and those that are required to conduct testing, may be as high as $242 million — added with another $191 million in annual costs.

This new regulation would apply to exchanges, clearinghouses, 15 alternative trading platforms which include 10 dark pools, systems that distribute public quote and trade data, the Financial Industry Regulatory Authority, and the Municipal Securities Rulemaking Board.

According to Bloomberg, Reg SCI will replace the SEC’s Automation Review Policy guidelines. The SEC estimates that compliance costs for the 44 organizations subject to the new rule will be between $61.6 million and $176 million, setting annual costs between $48.7 million and $125 million.

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