U.S. Securities and Exchange Commission Chairman Mary Jo White, responding after system errors caused a three-hour halt on the Nasdaq Stock Market, said she will push to adopt proposed automated-trading rules.
The failure that affected Nasdaq’s system for reporting quotes and prices bolsters the case to pass a proposal issued in March, White said in a statement. Advancing it will require the regulator to face down opposition by exchanges, which have pushed the SEC to limit the scope of the rule, including how much information about glitches they must be provide.
“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,” White said.
White, who told Congress earlier this year that she would scrutinize market stability efforts, also said yesterday she would “convene a meeting of the leaders of the exchanges and other major market participants to accelerate ongoing efforts to further strengthen our markets.”
Nasdaq said in a statement yesterday that the failure stemmed from “a connectivity issue between an exchange participant” and the system for disseminating quotes and prices, called a securities information processor, or SIP.
The SEC’s proposal, Regulation SCI, would require self-regulatory organizations such as exchanges, clearing firms and SIPs to adopt policies to prevent failures, stress test their systems to ensure trading continues through a disruption, and report glitches to regulators. The rule also would cover exchange competitors known as alternative trading systems, or dark pools. The SEC has said 10 dark pools are large enough to be subject to the regulation, based on data from 2012.
The rule would replace a voluntary program created after the stock market crash of 1987. Requiring compliance through a rule that would authorize the SEC to respond to compliance failures with penalties such as fines and sanctions.
“Reg SCI basically gives the SEC the ability to ding any exchange for any problem,” said James J. Angel, a finance professor at Georgetown University’s McDonough School of Business.
SEC Commissioner Michael Piwowar, who joined the agency last week, today advised caution on advancing the regulation. He said in a that while recent market disruptions, including errant options trades involving Goldman Sachs Group Inc., demand attention, the commission should should ensure that any new rule fits the facts learned from recent failures.
“Regulation SCI may or may not have contemplated what ultimately caused these disruptions,” Piwowar, a Republican economist, said in a phone interview. “Therefore, we should re-evaluate the assumptions underlying the Regulation SCI proposal before moving forward with further rulemaking.”
Exchanges said last month the SEC “significantly underestimated” the cost of compliance with the proposal. The agency calculated initial costs could be as much as $242 million for organizations subject to the regulation, with another $191 million in annual costs.
The exchanges also want the SEC to limit the rule to systems that support trading, clearance, settlement, order routing and market data in real time. They also say the commission should adopt a “materiality threshold” for reporting compliance failures or system intrusions to the regulator.
Some of the rule’s critics have questioned whether the SEC’s oversight authority allows it to impose technology standards on self-regulatory bodies, which enjoy a special status under federal law.
“Striking to me has been the kind of collective resistance by the self-regulatory organizations to much of what is in the release,” said Andrew M. Klein, a partner at Schiff Hardin LLP and former director of trading and markets at the SEC.
The SEC said it accelerated the writing of Regulation SCI after automated trading errors drove more than $450 million in losses for Knight Capital Group Inc. last year, leading to its sale to Getco LLC.
The proposal didn’t apply the requirements to broker-dealers.