SEC Chief to Summon Industry Heads After Tech Outages

The unusual statement from the head of the largest regulatory authority in the US follows a turbulent week in the nation's capital markets. On Tuesday, Goldman Sachs's systems entered an outsized number of erroneous buy orders in the options market, causing chaos as the exchanges and regulators picked through individual trades to decide whether or not to cancel them. Yesterday, a Nasdaq market data feed fell out of sync with its dissemination engine, leading to a blackout that lasted from 12:14pm until 3.25pm. A press officer from the White House, Josh Earnest, said in a daily media conference that President Barack Obama had been briefed on the situation as it occurred.

"The Commission is determined to enhance the safeguards necessary for strong market systems," says White. "As one step, I will work to advance rules that the Commission proposed earlier this year regarding new standards for the trading and other systems that are central to the integrity of our markets. I also will shortly convene a meeting of the leaders of the exchanges and other major market participants to accelerate ongoing efforts to further strengthen our markets."

Technical Problems
Two weeks earlier, BATS Global Markets experienced an hour-long outage, while outside of the United States, problems related to technology appear to have snowballed of late. In China, recently, Everbright Securities experienced issues with its high-frequency engine that led to nearly $4 billion in misplaced trades. The president of the company has since resigned, and Chinese regulators have announced that they are expanding their investigation of trading systems to include all mainland brokerage houses. Knight Capital famously lost hundreds of millions of dollars after its systems went haywire last summer, leading to a rescue from an industry consortium. It merged with high-frequency shop Getco several months ago to form the securities giant KCG Holdings.

The SEC is involved in an ongoing effort to strengthen the systems of financial entities, after fears that glitches such as those witnessed in Knight or Goldman's case could cause a contagion effect in financial markets. Events such as the US Flash Crash, too, have heightened concerns around areas such as algorithmic trading and the safeguards in place at exchanges to maintain orderly markets.

"Another day, another computer glitch in US trading," says Rik Turner, senior analyst, financial services technology at Ovum. "From the industry's perspective, the most ominous comment about yesterday's problem at Nasdaq came from [White], who said it should 'reinforce our collective commitment to addressing technological vulnerabilities of exchanges and other market participants.' In other words, more safeguards will be put in place, which if nothing else are certain to cramp the industry's style." Turner notes that around 40 percent of investment banks' IT budgets are currently dedicated to compliance, and further restrictions are likely to provoke resistance in some quarters.

[Yesterday's] interruption in trading, while resolved before the end of the day, was nonetheless serious and should reinforce our collective commitment to addressing technological vulnerabilities of exchanges and other market participants. - Mary Jo White, SEC.

"Still, while the systems continue to fail in one way or another, regulators will continue to fret and, in consequence, to pass new rules in an effort to safeguard the system," he continues. "Market participants, be they the buy side, sell side or trading venues, will just have to grin and bear it. And reach for their chequebooks."