SEC Orders Exchanges to Collaborate on Bolstering Markets

U.S. securities regulators told stock exchanges to collaborate on making markets more resilient, an attempt to prevent another disruption like Nasdaq OMX Group Inc.’s three-hour halt last month.

After Securities and Exchange Commission Chairman Mary Jo White’s meeting with the top executives of the nation’s stock and options markets in Washington today, the regulator said it asked them to “identify a series of concrete measures designed to address specific areas where the robustness and resilience of market systems can be improved.” NYSE Euronext Chief Executive Officer Duncan Niederauer said they have 60 days to respond.

White scheduled the gathering after Nasdaq’s securities information processor, a system for distributing stock quotes, failed on Aug. 22, prompting a three-hour trading halt for thousands of companies. The SEC asked exchanges to develop plans to bolster the SIPs run by Nasdaq and NYSE Euronext, review other potential points of failure, and evaluate rules for canceling transactions and restarting trading after halts.

“Our homework assignments are clear, they require collaboration and we’ve got 60 days,” Niederauer said in Washington after the meeting.

In the SEC’s statement, White said she emphasized the need for exchanges to work together on the issues she identified. Niederauer and CBOE Holdings Inc. Chairman William Brodsky both characterized the talks as “constructive” during interviews in Washington.

‘Great Job’

“I thought she did a great job,” Brodsky said. “We’re going to cooperate together, and I think it is overall a very positive thing.”

Meeting participants included representatives from the U.S. stock and options exchanges, the Financial Industry Regulatory Authority, Depository Trust & Clearing Corp. and Options Clearing Corp.

Nasdaq’s computers were flooded Aug. 22 with data from NYSE Arca, a rival exchange, revealing a bug in Nasdaq’s SIP software that disabled systems that should have prevented the malfunction from snowballing.

Exchanges were told today to “provide comprehensive action plans that address the standards necessary to establish highly resilient and robust systems for the securities information processors,” the SEC said in a statement today. That includes “testing standards and disclosure protocols.”

Kill Switches

The SEC asked market operators to figure out how to implement “kill switches” that shut trading following a technology breakdown.

Gary Katz, the CEO of Deutsche Boerse AG’s International Securities Exchange, said the most important outcome of the meeting could be the focus on addressing single points of failure, where one computer bug or mistake paralyzes the entire market.

“These are areas where redudancy would help,” he said. “And by looking at that with a keen eye to recognizing that the industry and the technology continues to evolve, you can make a habit of it, something that’s regularly done.”

White also told exchanges to work on coming up with uniform rules for how to handle erroneous trades in the options market. That followed errant options trades by Goldman Sachs Group Inc. on Aug. 20, which resulted in different markets applying different standards to cancellations.

Tony McCormick, the CEO of BOX Options Exchange LLC, said there was acknowledgment in the meeting that there are too many variations in rules between the exchanges.

“There was a general feeling that from the standpoint of end users, particularly sophisticated end users that are providing liquidity and are affected more directly, you need to have a standardization around that so everybody understands what the landscape is and how these things are treated,” he said.

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