US Senate panel to hold hearing on automated trading

Tue Dec 11, 2012 6:55pm EST

* Hearing to feature top exchange, bank officials

* Senators to explore rules for high-speed trading

* Sen. Reed called for review after Knight, Nasdaq glitches

* Senators also expected to ask about SEC's security lapse

* SEC had left sensitive data on unencrypted laptops

By Sarah N. Lynch

WASHINGTON, Dec 11 (Reuters) - A U.S. Senate banking subcommittee will hold a hearing next Tuesday to examine whether regulators should impose new rules to protect markets from glitches in a world of high-speed computerized trading.

The event will mark the latest hearing on the issue to be called by Rhode Island Democrat Jack Reed, who chairs the Senate Banking subcommittee on securities.

Reed pledged in September to take a closer look at the safety and soundness of the equity markets following a string of high-profile technology errors, including Nasdaq's botched handling of the Facebook IPO and Knight Capital's $440 million in losses due to a software error. [I.D. nL1E8KK7WO]

Those events, he said at the time, raise serious questions about whether regulations have kept pace with changing technology in the marketplace.

The Securities and Exchange Commission is also in the process of reviewing potential new regulations, such as a "kill switch" mechanism that can shut off access to the market before a glitch can have a ripple effect.

Exchange officials scheduled to testify next week include New York Stock Exchange Chief Operating Officer Lawrence Leibowitz and Nasdaq OMX's Vice President of Transaction Services Eric Noll, as well as executives from Credit Suisse and ITG.

In addition to looking at issues raised by automated trading, some U.S senators are also expected to ask questions about the SEC's failure to encrypt some computers containing highly sensitive stock exchange data, according to a Senate Democratic aide.

The security lapses were detailed in a non-public Aug. 30 report by Interim Inspector General Jon Rymer. The report has been reviewed by Reuters.

The report found that some staff in the SEC's Trading and Markets Division did not encrypt computers, iPads and other devices containing confidential data from the exchanges and clearing agencies they were overseeing.

Those employees were responsible for reviewing the cyber security policies and practices at the exchanges. They urged exchanges to tighten cyber protections at the same time they were using unprotected computers.

The SEC has said there is no evidence any data was compromised, and that two of the employees responsible have left the agency.

However, exchanges remain worried, partly because the inspector general's report says only "several select laptops" of 28 were tested for potential breaches.

The New York Stock Exchange has gone so far as to hire former Homeland Security Secretary Michael Chertoff to dig deeper into the matter. [I.D. nL1E8MG95K]