October 2, 2012 / 9:51 PM / 8 years ago

US market players urge caution on designing 'kill switches'

* SEC convenes roundtable following Knight error

* Executives broadly support concept of kill switches

By Sarah N. Lynch

WASHINGTON, Oct 2 (Reuters) - Brokerage and exchange technology gurus generally endorsed the concept of deploying “kill switches” to stop computer errors before they can unleash havoc on the market, but they warned regulators on Tuesday to ensure they are not set off too easily.

Speaking at a roundtable hosted by the U.S. Securities and Exchange Commission, experts said they recognized the need for more safeguards after a series of scary software glitches.

“I think kill switches are important, but we need to ensure that we don’t think of them as the big red easy button,” said Anna Ewing, an executive vice president and chief information officer at Nasdaq OMX. “It is layered. It is complex.”

The SEC convened the roundtable following a major glitch at Knight Capital on Aug. 1 that led to a $440 million trading loss that nearly bankrupted the firm.

The error was the third high-profile technology problem experienced by major market players this year. The first hit BATS Global Markets during its attempt at an initial public offering, and the second major glitch plagued Nasdaq during Facebook’s market debut.

Those incidents have prompted an industry-wide discussion into whether broker-dealers, exchanges, or both, should all be required to have mechanisms that can shut down trading if things go haywire.

The SEC has also launched a broad review into technology issues at major brokerage firms. The agency’s examinations staff has sent out two batches of questionnaires to a sampling of brokerages asking for detailed information surrounding their automated systems for order-taking and order processing.

“Our concern is not whether a single firm might fail, but whether it causes collateral damage to investors and their confidence in the integrity and stability of our markets,” SEC Chairman Mary Schapiro said.


Some executives on Tuesday warned against designing a kill switch that might too easily shut down trading, saying automatic pre-set triggers might not be the solution in every instance.

Lou Steinberg, the chief technology officer at TD Ameritrade , said it makes sense for market makers and exchanges in some cases to maintain a “human discussion” when they identify unusual trading rather than letting a kill switch automatically step in.

“We wouldn’t want them to activate an automated kill switch and shut us off because that would in fact destabilize an environment that we’re trying to add stability into,” he said.

Some of the back-and forth on Tuesday saw Schapiro interject at times, such as to a comment that it is a “commercial” decision by each firm to stop processing orders.

“I disagree with that,” she said. “I don’t think it is just a commercial decision. I think it’s a broader market integrity and confidence in the markets decision.”

The recent string of events raised concerns among policymakers about the collateral damage that one technology error can unleash on the markets, particularly in an automated world dominated by lightening-fast trading.

The SEC is trying to get a better handle on high-frequency trading and its impact on average investors.

It recently launched a new Office of Analytics and Research.

Housed within the SEC’s Trading and Markets Division, the office is hiring math whizzes and subscribing to the same proprietary data feeds that high-frequency traders use themselves to examine trading patterns in orders and cancellations.

The SEC is still a ways from any new policies to address issues posed by high-speed trading, especially because the new research office still needs time to do its analysis.

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