The Securities and Exchange Commission Thursday proposed new rules designed to protect against the kinds of technical disruptions that plagued stock exchanges last year.
Members of the commission voted unanimously to require stock exchanges and certain alternative trading systems to “carefully design, develop, test, maintain, and surveil systems that are integral to their operations.’’ They also would have to provide notification of disruptions to their systems.
The set of rules, called Regulation Systems, Compliance and Integrity, comes after three well-publicized events disrupted national stock exchanges last year. These included the flawed initial offering of stock to the public for Facebook on the Nasdaq Stock Market, the initial public offering of stock from exchange operator BATS Global Market that also was botched by BATS itself, and the flood of erroneous that spewed onto the nation’s exchanges from market maker Knight Capital on August 1.
Reg SCI would replace the current voluntary program for maintaining system integrity, with enforceable rules, chairman Elisse B. Walter said.
“While it’s not possible to prevent every technological error that market participants may commit, we must ensure that our regulations are designed to minimize their impact on our markets and ultimately investors,” said SEC Chairman Elisse B. Walter. “Reg SCI would provide more explicit technology and control standards to help ensure that our markets remain resilient against technological vulnerabilities.”
Under the proposed rules, the systems underlying national exchanges and ATS’s whose volume passes a stated threshold would have to meet specified technical standards and undergo testing that showed the exchanges could continue to operate, when the systems underwent stress. The exchanges and alternate trading systems also would have to send out notifciations of systems disruptions and certain types of technical issues.
Some clearing agencies also would have to follow Reg SCI rules.
“Core technology” affected by the rule would include systems that “directly support trading, clearance and settlement, order routing, market data, regulation, or surveillance,’’ the SEC said.
Firms would have to conduct an annual review of compliance with Reg SCI and submit an annual report to their own senior management, as well as the SEC. SEC staff also would get access to the venues’ core systems, in order to assess compliance with Reg SCI.
The rules will await public comment for 60 days, once the proposed regulation is published in the Federal Register.
