SEC Developing Rule Requiring Exchanges to Test Technology
February 19, 2013
Exchanges and clearing firms would have to routinely test their technology for stability and security under a rule being drafted by the U.S. Securities and Exchange Commission.
SEC Chairman Elisse B. Walter told an audience at American University’s Washington College of Law today that the agency has accelerated a proposal for a mandatory technology-review program.
The rule, currently dubbed Reg SCI, would require exchanges, alternative trading systems and clearing services to conduct business continuity tests and meet systems integrity standards. “SCI” stands for systems compliance and integrity.
Reg SCI would require market participants to test how their systems respond to outages and notify the agency about any disruptions.
The rule would convert a voluntary program, known as Automation Review Policy, that was created after the Oct. 16, 1987, market crash known as “Black Monday.” Under that program, exchanges voluntarily follow SEC guidance and submit to periodic SEC inspections of their systems.
“A voluntary standard is no substitute for a mandate and a requirement that you must follow,” Walter told reporters after the speech. She declined to say when the SEC might release a rule proposal for public comment.
Walter’s speech surveyed the SEC’s efforts to improve its technology in an era of high-frequency traders and electronic market makers. The commission’s Market Information Data Analytics System (MIDAS) and planned consolidated audit trail are key to that effort, she said.
The consolidated audit trail will trace how orders are routed through the equity market’s complex plumbing. Midas will allow the commission to view all orders, order cancellations and trade executions on U.S. exchanges.
Last year, the SEC awarded a contract to Tradeworx of Red Bank, N.J., and its high-speed trading technology arm to develop and deliver a system that will allow four of its divisions to track creation, modification and The system will allow the federal regulator to collect, store, aggregate, monitor, query, manipulate, and analyze trades, quotes and orders on stocks and options, as disseminated by national securities exchanges, over-the-counter markets and alternative trading systems, according to the request for proposals issued at the end of 2011 by the SEC’s divisions of Trading and Markets and Risk, Strategy and Financial Innovation.
The system, which the divisions have begun to implement, will provide the SEC with the ability to look at all activity on public markets. The system will not include data from dark pools of capital, which now account for roughly one-third of all trading.
While the SEC has said the MIDAS data will help it reconstruct the causes of market crashes, Walter said today that it could also inform how new regulations are written.