SEC Roundtable on Market Technology
AT TODAY’S SEC MARKET TECHNOLOGY ROUNDTABLE, Commissioners, staff, and industry panelists discussed market structure and infrastructure issues as it relates to the testing, deployment, and use of software systems as well as current best practices for responding to errors and malfunctions and managing crises in real-time.
SEC Chairman Mary Schapiro and Commissioners Elisse Walter, Troy Paredes and Daniel Gallagher were in attendance and participated in the question and answer session. In her brief opening remarks, Schapiro provided an overview of new measures the SEC has implemented to mitigate market stresses, including more advanced limit up-limit down procedures, rules banning naked access, and rules requiring self-regulatory organizations to develop consolidated audit trails. She touted the utility of such measures but added that a number of issues deserve closer scrutiny by the Commission, including data latencies, examining the high volume of cancellations, a proliferation of order types, and high frequency trading in general, among others.
The first panel discussed the sufficiency of current systems to support the integrity of markets, and measures the SEC and market participants should be taking to strengthen testing and design protocols and procedures. Paredes asked how market participants make decisions on best practice procedures, specifically as it relates to the extent of software testing. Panelists noted that the extent of appropriate testing cannot be known with complete certainty; therefore determinations are better made by analyzing the costs of potential errors.
Paredes followed up by asking what, if anything, the SEC is doing to impede testing activities and what the Commission can do to facilitate more testing. All of the panelists agreed that more real-time reporting in all exchanges is needed as well as enforcement of real-time reporting to the Depository Trust and Clearing Corporation so that more complete assessments can be made of member exposures. Panelists also recommended the use of kill switches as well as conducting a review of how firms take advantage of current testing opportunities.
Robert Cook, Director of the SEC’s Division of Trading and Markets, posed the question of quality assurance (QA), asking the panelists what they felt was the best way to minimize software errors. The general consensus of the panel was that an internal QA team would be the most effective and efficient means of handling a software error. Panelists stated that an independent third party would require a large amount of time to be brought up to speed and would not have sufficient knowledge of the business. The panel agreed that the use of peer review throughout the development process was the most effective way of minimizing errors and costs. The panelists added that thorough quality assurance procedures are the only way to minimize risks associated with software errors.
Minimizing complexity in the software of the marketplace was the next challenge posed to the panel, since some panelists asserted that more complex coding tends to lead to more errors. The panelists stressed the need to reduce the amount of order types that exist in the marketplace, which account for the bulk of the complexity in software coding.
Discussions during the second panel focused on appropriate technological responses to errors and malfunctions. All of the parties agreed on the idea of kill switches; however no consensus arose over how such mechanisms would be best implemented. Schapiro questioned whether dynamic kill switches would introduce more complexity and asked if a “blunter but simpler” tool should be the “way to go.” The panelists agreed that simplicity is important but stressed the need to create multiple layers and thresholds to ensure that the kill switch was not used at an inappropriate time. They also stated their desire to have comprehensive communication and time for explanation before the switch went off.
Cook concluded the roundtable by asking what other issues the SEC should be looking at to reduce risk in the system. Panelists reiterated the need for full participation in real-time reporting so that participants can undertake more effective real-time market surveillance.
For more information on the roundtable, please click here.
AT TODAY’S SEC MARKET TECHNOLOGY ROUNDTABLE, Commissioners, staff, and industry panelists discussed market structure and infrastructure issues as it relates to the testing, deployment, and use of software systems as well as current best practices for responding to errors and malfunctions and managing crises in real-time.
SEC Chairman Mary Schapiro and Commissioners Elisse Walter, Troy Paredes and Daniel Gallagher were in attendance and participated in the question and answer session. In her brief opening remarks, Schapiro provided an overview of new measures the SEC has implemented to mitigate market stresses, including more advanced limit up-limit down procedures, rules banning naked access, and rules requiring self-regulatory organizations to develop consolidated audit trails. She touted the utility of such measures but added that a number of issues deserve closer scrutiny by the Commission, including data latencies, examining the high volume of cancellations, a proliferation of order types, and high frequency trading in general, among others.
The first panel discussed the sufficiency of current systems to support the integrity of markets, and measures the SEC and market participants should be taking to strengthen testing and design protocols and procedures. Paredes asked how market participants make decisions on best practice procedures, specifically as it relates to the extent of software testing. Panelists noted that the extent of appropriate testing cannot be known with complete certainty; therefore determinations are better made by analyzing the costs of potential errors.
Paredes followed up by asking what, if anything, the SEC is doing to impede testing activities and what the Commission can do to facilitate more testing. All of the panelists agreed that more real-time reporting in all exchanges is needed as well as enforcement of real-time reporting to the Depository Trust and Clearing Corporation so that more complete assessments can be made of member exposures. Panelists also recommended the use of kill switches as well as conducting a review of how firms take advantage of current testing opportunities.
Robert Cook, Director of the SEC’s Division of Trading and Markets, posed the question of quality assurance (QA), asking the panelists what they felt was the best way to minimize software errors. The general consensus of the panel was that an internal QA team would be the most effective and efficient means of handling a software error. Panelists stated that an independent third party would require a large amount of time to be brought up to speed and would not have sufficient knowledge of the business. The panel agreed that the use of peer review throughout the development process was the most effective way of minimizing errors and costs. The panelists added that thorough quality assurance procedures are the only way to minimize risks associated with software errors.
Minimizing complexity in the software of the marketplace was the next challenge posed to the panel, since some panelists asserted that more complex coding tends to lead to more errors. The panelists stressed the need to reduce the amount of order types that exist in the marketplace, which account for the bulk of the complexity in software coding.
Discussions during the second panel focused on appropriate technological responses to errors and malfunctions. All of the parties agreed on the idea of kill switches; however no consensus arose over how such mechanisms would be best implemented. Schapiro questioned whether dynamic kill switches would introduce more complexity and asked if a “blunter but simpler” tool should be the “way to go.” The panelists agreed that simplicity is important but stressed the need to create multiple layers and thresholds to ensure that the kill switch was not used at an inappropriate time. They also stated their desire to have comprehensive communication and time for explanation before the switch went off.
Cook concluded the roundtable by asking what other issues the SEC should be looking at to reduce risk in the system. Panelists reiterated the need for full participation in real-time reporting so that participants can undertake more effective real-time market surveillance.
For more information on the roundtable, please click here.