SEC sets zero-tolerance objective for glitches at exchanges

NEW YORK Tue Sep 24, 2013 4:47pm EDT

A sign for the Securities and Exchange Commission (SEC) is pictured in the foyer of the Fort Worth Regional Office in Fort Worth, Texas June 28, 2012. REUTERS/Mike Stone

A sign for the Securities and Exchange Commission (SEC) is pictured in the foyer of the Fort Worth Regional Office in Fort Worth, Texas June 28, 2012.

Credit: Reuters/Mike Stone

NEW YORK (Reuters) - Technical glitches and other operational errors at U.S. exchanges cannot be tolerated, given the high-speed, interconnected nature of the markets, the head of the Securities and Exchange Commission said on Tuesday.

A number of recent high-profile glitches at exchanges and trading firms have roiled markets and shaken investor confidence, prompting the SEC to increase its focus on operational risk.

"The key is a zero tolerance objective," SEC Chair Mary Jo White said at the Bloomberg Markets 50 Summit in New York. "We obviously know that in any system you are going to have issues, and you also need to have a very robust way to respond, a very quick way to respond, a good way to communicate when you actually do have an incident."

White, who is scheduled to address traders next week at the Security Traders Association's conference in Washington D.C., also said fines and other enforcement actions could be used in the future to deal with such cases.

Under White's predecessor, the SEC leveled a penalty of $10 million against Nasdaq OMX Group Inc in May as a result of technical problems and other mistakes related to Facebook Inc's initial public offering a year earlier.

At a meeting on September 12, White asked the heads of the exchanges to come up with "a very robust action plan" to prevent and address technical problems in the wake of a three-hour trading outage in Nasdaq-listed stocks.

The August 22 outage was caused by a software bug. That same week, a technical error at Goldman Sachs Group Inc led to a flood of options orders accidentally flooding the markets, and then less than four weeks later, a software bug connected to a unit of NYSE Euronext was at the root of a brief halt across U.S. options markets.

The SEC proposed reforms in March, called Regulation Systems Compliance and Integrity (SCI), to strengthen the robustness of the technology of the exchanges and large alternative trading platforms.

The proposal, which has met some resistance from the industry, was fast tracked after Knight Capital Group, now called KCG Holdings Inc, nearly collapsed after a software error led to a $461 million trading loss.

The exchanges, along with the Financial Industry Regulatory Authority, wrote a letter to the SEC in July saying that, while they support the main objectives of the regulation, they have concerns its obligations would result in a "significant cost burden" on the exchanges.

"SCI is a proposal ... What we've asked of all market participants, including the exchanges, is that they engage constructively with us on ... having a very robust set of rules that are workable," White told Reuters on the sidelines of the summit.

(Reporting by John McCrank. Editing by Andre Grenon)

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