[ by Howard Haykin ]

The SEC announced Wednesday plans to convene a public meeting on Wednesday, 3/6/13 to weigh new rules designed to prevent software errors and other problems from disrupting capital markets.  The SEC proposal responds to several high profile technology debacles in 2012 - including Nasdaq's botched handling of Facebook's IPO, Knight Capital's software error that caused hundreds of thousands of erroneous and unauthorized orders to fill the market on 8/1/12 - timed to disrupt the launch of NYSE's Retail Liquidity Program - and the failed processing on the BATS exchange of its own IPO.

Rules Under Consideration.   SEC Chairman Elisse Walter, earlier this month, said during a speech that several rules were being considered to address this growing and highly-publicized problem.  Several suggested rules include such proposed safeguards as the following:

• require exchanges and other trading platforms to perform business continuity testing  ("Regulation SCI.")
• require exchanges, alternative trading systems (ATSs) and clearing agencies to publish notifications about disruptions and to meet certain technological standards.

Current Safeguards.   Currently the industry relies upon a voluntary standard known as "automation review policies" or "ARP."  The SEC first developed ARP after the 1987 market crash.  ARP sets forth guidance for exchanges, some ATSs and clearing agencies to help ensure their systems are stable, secure and have the capacity to deal with glitches that can send markets into a tailspin. 

Replacement of voluntary self-policing with rules would permit the SEC to take enforcement actions against entities that fail to comply with them.   [ Reuters, 2/27/13 ].