The Securities and Exchange Commission today announced the agenda for its upcoming market technology roundtable that will focus on the relationship between the operational stability and integrity of the securities markets and the ways that market participants design, implement, and manage complex and interconnected trading technologies.
The roundtable, announced earlier this month, will take place on September 14 in Washington D.C. Participants will be finalized and announced at a later date.
At present, nearly all trading activity in the equity and options markets flows through a wide variety of interconnected automated systems used by investors, broker-dealers, exchanges and other trading venues. Given the high speeds at which many market participants can generate and process orders and trades, errors in automated processes can rapidly compound. Furthermore, because other market participants react equally as fast to the activities of those market participants, errors generated by one system or firm can quickly propagate across the entire marketplace, resulting in a cascade of further error-related activities.
As recent market events caused by technology-related issues have shown, such disruptions can erode investor confidence and can impact the stability and price-discovery function of the markets. In some cases these events can lead to significant losses for a small number of parties. In other cases, there may be a wider distribution of smaller losses to many parties including individual investors.
A reliable and robust market infrastructure is a critical component of protecting investors and ensuring fair, orderly, and efficient markets for all participants. Over the past few years the Commission and the self-regulatory organizations that oversee the markets have adopted a number of specific regulatory measures designed to limit the broader impact of potentially erroneous activities. Such measures include the single-stock circuit breaker mechanism, the new limit-up/limit-down mechanism, and rules providing clarity for when trades may be canceled. The SEC’s Market Access Rule, adopted in 2010, further addresses concerns about automated trading systems by requiring broker-dealers accessing the markets to establish risk management controls and supervisory procedures reasonably designed to manage financial, regulatory, and other risks of this business activity.
While the SEC recognizes the central role that technology plays in different aspects of our market structure, the agenda set forth below is intended to focus on how appropriate controls or processes for the implementation of technology can support a robust and reliable market. The premise of this discussion is that regardless of how market structure evolves in the future, technology will continue to play a central role in the markets and present both opportunities and risks for market participants, including investors.
The focus of the first panel of the roundtable is error prevention – technology experts will discuss current best practices and practical constraints for creating, deploying, and operating mission-critical systems, including those that are used to automatically generate and route orders, match trades, confirm transactions, and disseminate data.
The focus of the second panel is error response – experts will discuss how the market might employ independent filters, objective tests, and other real-time processes or crisis-management procedures to detect, limit, and possibly terminate erroneous market activities when they do occur, thereby limiting the impact of such errors.
Panel 1 – Preventing Errors through Robust System Design, Deployment, and Operation
What are current best practices for ensuring adequate testing, robustness, deployment, and use of software systems? How do business objectives impact technology decisions? How do market participants balance speed-to-market against the need for extensive testing, or the costs of additional redundancy and safeguards compared with the potential benefits of innovation and rapid development?
What level of robustness is expected by the market? What is needed? Are there acceptable rates of errors? What levels are practical or achievable? How do firms test their system for capacity, contingencies, and other unexpected circumstances? How is scenario testing performed? Who determines what types of operational risk scenarios a system must be able to withstand?
What is the role of independent parties in testing or certifying the many aspects of a robust software development life cycle?
What additional role, if any, might further or different regulations play in these processes?
Panel 2 – Responding to Errors and Malfunctions and Managing Crises in Real-Time
What are best practices for managing and containing errors when they do occur? How do firms monitor for “unforeseen” problems? What types of technologies or processes would allow for real-time identification of issues and intervention? What are some specific types of real-time testing used today by market participants to monitor for potential erroneous activity? Are there tests for capital, margin, and credit? What is the role of independent real-time monitoring or filtering by other parties (e.g., exchanges filtering participant activities)?
Can responses by automated? Who has the authority to perform real-time corrective actions? Are there ways to automatically terminate erroneous activity? How would such activity be identified in real-time?
Are there gaps in market “safety nets” that should be addressed? What are the potential market implications for increasing safety nets? Would additional tests and filters slow access to the markets? How should the market balance the potential for improved stability against the impact and costs of additional filters? What are the considerations for investor confidence, investor protection, capital formation, and market efficiency?