'More Hair-Triggered’ Kill Switches Needed, FINRA Says
September 21, 2012
WASHINGTON, D.C. -- Faster ‘kill switches’ are needed to prevent market disruptions such as the August 1 flood of erroneous orders from market maker Knight Capital, the head of the independent regulator of brokers said Thursday.
''Kill switches have to be far more hair-triggered than they have been in the past,’’ said Richard Ketchum, chief executive of the Financial Industry Regulatory Authority.
Brokers need to have careful supervisory procedures in place, to prevent the harm of an incident like the Knight Capital runaway algorithm on August 1. That new piece of code, which had a “large software bug’’ in it, unleashed a flood of orders in the first 45 minutes of trading onto the New York Stock Exchange and other markets.
Kill switches that stop orders flowing, in such cases, are needed, as are better monitoring and testing procedures, he said at the Security Traders Association conference on market structure here.
A broker needs to know who’s responsible for monitoring new code once it goes into use, not just who’s responsible for managing the project that develops the code.
Too often, he said, regulators find there aren’t careful protocols written down to make sure that each time code begins interacting with markets for the first time. Brokers, he said, to make sure that a designated individual is monitoring activity and in position to kill it, if it goes awry.
Firms should actively strive to institute new controls, test them and upgrade them, regularly, as well, Ketchum said. All controls should be tested at least annually to make sure they work as intended and are effective.
Regulators also should look at whether there should be controls in place at stock exchanges as well, he said. But Ketchum left that to the Securities and Exchange Commission to address.
