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Markets Regulation
Fresh SEC crackdown on ‘flash crashes’
From the Financial Times of Wed, 19 Nov 2014 16:04:32 GMT
WASHINGTON, DC - JULY 30: Securities and Exchange Commission Chairman Mary Jo White testifies before the Senate Banking, Housing and Urban Affairs Committee in the Dirksen Senate Office Building on Capitol Hill July 30, 2013 in Washington, DC. White and Commodity Futures Trading Commission Chairman Gary Gensler testified and took questions from Senators during the hearing titled, "Mitigating Systemic Risk in Financial Markets through Wall Street Reforms." (Photo by Chip Somodevilla/Getty Images)©Getty

Mary Jo White chairs the SEC

Trading firms and exchanges will face heavier scrutiny from US regulators aimed at preventing glitches like those that have triggered market chaos and seen investors lose hundreds of millions of dollars in a matter of minutes.

The Securities and Exchange Commission announced rules requiring certain market participants – including the Nasdaq and New York stock exchanges – to ensure their technology meets specific criteria, to conduct routine testing of systems and to notify authorities in the event of market disruptions.

The decision came as regulators grapple with the issue of how to formulate rules to prevent glitches of the kind that have shaken confidence in financial markets, which are increasingly dominated by computerised high-frequency trading.

“Investors deserve better,” said SEC chairwoman Mary Jo White. “Failures must be minimised and, when they occur, they must be remediated as quickly as possible and promptly reported to the commission.

“Investors should expect no less of the world’s premier securities markets – indeed, investor confidence depends on it.”

In one of the most high-profile mishaps so far, Nasdaq was hit last year with the largest fine yet imposed on an exchange, paying $10m for the botched Facebook IPO. Its system had been overwhelmed by the number of orders, which delayed opening trades and caused investors to lose hundreds of millions of dollars.

But smaller market events have roiled markets. In 2012 trading firm Knight Capital said it lost $440m in 30 minutes because of software glitches, which also sparked chaos in the markets.

The regulation, known as Regulation SCI, came a day after Home Depot became the latest flash crash victim in the US equity market. On Tuesday the New York Stock Exchange cancelled trades in the company’s shares after the stock fell sharply, briefly wiping more than $12bn off its value.

The final decision by the SEC came after a delayed vote in October following criticism from Democrat commissioners that the rules did not go far enough to control markets – in particular for failing to include brokers that deal with retail investors.

While the rules passed unanimously, with support from both Republican and Democrat commissioners, Ms White said the SEC would now consider whether similar regulation should apply to broker-dealers and others.

Wall Street participants, including the Securities Industry and Financial Markets Association, have fought against expanding the proposal to include brokers, arguing that this would increase costs for investors.

The rules will be enforceable by the authorities and replace a voluntary compliance system. They are set to apply to stock exchanges, trading venues for options, certain dark pools, registered clearing agencies and other “significant” alternative trading systems.

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