Exchanges working together to combat technology-related errors last week announced a set of solutions two months after meeting with the top securities regulator, but concerns over future glitches remain.
The two-month deadline, set by Securities and Exchange Commission chair Mary Jo White, showed renewed tenacity from the regulator in light of the 22 August failure of Nasdaq’s securities information processor, or SIP. But planned reforms may do little to shore up market confidence.
In a statement from the 11 self-regulatory organisations (SROs) and exchanges that contributed to the proposal, they said they would improve SIP resiliency, strengthen interoperability standards and disaster recover capabilities, enhance governance, accountability and transparency and establish a clear testing framework for the industry.
But, several participants have questioned the SIP’s role as a critical market infrastructure, increasingly laden with a high volume of trading data to disseminate. In coming months, the SIP will calculate the price bands of the limit up-limit down (LULD) mechanism, increasing the amount of information it processes.
For Nasdaq OMX, phase two of LULD begins on 8 December whereby the SIP will be responsible for on-going, intra-day LULD calculations, which Jim Toes, president and CEO of the Securities Traders Association, believes will significantly increase the likelihood of future faults.
“We are very concerned about the [August] outage at Nasdaq, but of more concern is SIPs’ new role,” he told theTRADEnews.com. “There will be a lot of publicly traded securities, a lot of information, a number of calculations, and then that all has to be disseminated to the public.”
Toes said exchanges had shown success in working together on key issues since the May 2010 flash crash, such as agreeing a common definition for clearly erroneous trades, but said the approach to reforming rules and governance around the SIP would have to focus on its future role.
“Right now, the SIP is doing something that is basic, but when LULD is extended, it’s going to have a far more complex function,” he said.
Details of last week’s exchange proposals will be presented in future SRO rule filings and Regulation National Market System plan amendments that will be subject to public comment and SEC approval, although theTRADEnews.com understands that more details will be released in coming weeks.
Despite the progress of exchanges, achieved within relatively short 60-day deadline, the industry may have to re-evaluate the role of the SIP in contemporary market structure to prevent future market errors.
“The SIP is slower compared to many proprietary systems,” said Jamie Selway, head of electronic brokerage and sales for agency broker ITG.
“But there are also key questions around whether the SIP is modern enough to function in the evolving market structure, especially around governance and safety,” he said.
In addition to limiting the number of exchange glitches that have occurred in recent years, Selway said exchanges must review the communication mechanisms by which participants are alerted to market errors – decisions to which a wider group of market actors should contribute.
“SROs have made great headway in coming together to solve these types of issues, but there are concerns in the industry that broker-dealers and institutional investors should have a greater role within these decision making processes,” Selway said.