[ by Howard Haykin ] Tighter.  Stronger.  Automated-Trading Rules. Just a week after Knight Capital Group was victimized by an "auto-trading program gone wild," SEC staffers are hard at work writing new trading rules that could change the way exchanges manage order flow from members' automated systems.  The SEC seeks to ensure that all exchanges have rules and policies in place to ensure that their respective trade processing systems can safely handle trading demands - that, according to a person familiar with the SEC's work who spoke on condition of anonymity because the process isn’t public. Knight Nearly Succumbs to 8/1/12 Avalanche of Orders. After every NITE order had been executed - i.e., the avalanche of order belched out by the runaway trading system - the firm held about $7 billion in securities.  It closed out those positions at a loss of $440 million - $270 million in losses after taxes. SEC Chairman Mary Schapiro announced on 8/3 that she had asked her staff to hasten work "to require exchanges and other market centers to have specific programs in place to ensure the capacity and integrity of their systems."  The SEC reportedly will hold a public meeting with industry participants in September to talk about ways the SEC can better oversee trading technology. SEC's Specific Concerns. The malfunction at Knight tripped safeguards previously put into place by the SEC - including the activated single-stock circuit breakers to halt trading, which went into effect following the infamous Flash Crash of May 6, 2010. Schapiro pointed out her agency’s recent market-access rules already require broker-dealers to keep tabs on their own trading systems "to ensure they are operating properly." The SEC’s so-called automation review policies with the exchanges - that were prompted by the 1987 market crash - require exchanges to notify the regulator of trading failures or security lapses.  Portions of those policies reportedly will serve as the basis for the new rules. In a speech given March 2011, Ms. Schapiro saying that the policies with exchanges should be made mandatory, expressed these words:

"Such a regulation would require market participants to meet adequate standards for the capacity, resiliency, and security of their automated systems.  These rules could apply to exchanges, alternative trading systems handling appreciable volume, clearing agencies, depositories and securities information processors."

For further details, go to:  [Bloomberg, 8/7/12].