A week after Knight Capital incurred a $440m loss from erroneous electronic trades the main regulator of US equity markets said on Wednesday it will host an industry forum next month to explore ways to safeguard automated systems.
“Reliance on technology has enabled the markets to achieve extraordinary levels of speed and efficiency,” said Mary Schapiro, chairman of the Securities and Exchange Commission, ahead of the September 14 roundtable.
“But with technology comes a responsibility for getting it right, minimising errors and protecting the interests of investors.”
The trading loss at Knight, which resulted in a number of Wall Street firms injecting $400m into the broker over the weekend, has focused attention on the unexpected problems associated with computer software that underpins the rapid-fire trading of US equities and options.
The SEC is already understood to be seeking trading firms and other market participants to disclose system failures and test computer-code changes before they go live.
The major problem, contend many in the industry, is that computer code cannot be completely free of bugs. Stress testing of new systems also does not guarantee that potential problems will be identified.
Earlier this year, software glitches prevented BATS from completing its initial public offering. The debut of trading in shares of Facebook was also plagued by technical problems that were costly for Nasdaq and broker/dealers, including Knight.
“Recent events have highlighted some of the risks of increasingly complex and interconnected trading systems, setting aside the larger public debate regarding high-frequency trading,” the SEC said.
Many in the industry expect a debate over standards governing the introduction of new software and its testing, a focus on whether the main exchanges should have greater power to shut down trades they believe may be erroneous and a discussion of whether a “kill switch” can be introduced to shut down a computer trading system that starts malfunctioning.
“The industry has an obligation to solve this and the idea of a kill switch is worth exploring, but whether we can implement such a function in a practical way is the question,” said a senior officer at one US exchange.