Exchanges Seek Delay on Systems Rule

Terry Flanagan

Securities exchanges have requested the Securities and Exchange Commission to extend the comment period on its proposed Regulation Systems Compliance and Integrity, or Reg SCI, until August 22, 2013.

In a letter to the SEC, the exchanges said that Reg SCI would have a significant impact on the compliance, regulatory and technical operations of self-regulatory organizations (SROs), as well as many of their members and participants.

“Given its comprehensive scope, and that the Commission has included more than 200 specific questions in the proposing release, the SROs are devoting significant time and substantial resources to analyzing and understanding proposed Regulation SCI,” said the letter, which was signed by 17 national securities exchanges. “The SROs believe that a thorough comment on this proposal requires more time than has been currently provided.”

The SEC had originally set the comment deadline for May 24, but has extended it until July 8.

Reg SCI is designed to ensure that core technology of national securities exchanges, alternative trading systems, clearing agencies, and plan processors meet certain standards and that these entities conduct business continuity testing with their members and participates.

For the past two decades, self-regulatory organizations have followed a voluntary set of principles articulated in the SEC’s Automation Review Policy and participated in what is known as the ARP Inspection Program.

The SEC has noted that the continuing evolution of the securities markets to where they have become almost entirely electronic and highly dependent on sophisticated trading and other technology (including complex regulatory and surveillance has posed challenges for the ARP Inspection Program.

With the advent of drag-and-drop software development, traders can easily and quickly create algorithms and launch them into production, which creates risks.

“One of the biggest changes in the financial markets industry has been the deployment of drag-and-drop technology, which allows traders to put their own strategies into production themselves,” said James McInnes, CEO of trading software provider Embium. “What’s needed is to blend the speed of deployment of modern algorithmic development techniques with rigorous quality assurance and testing disciplines.”

With the increasing reliance on automated trading by market participants, there is also the increased risk of something going wrong, such as an algorithm going haywire, or even something as mundane as a “fat finger” error.

Exchanges are bolstering software quality assurance not only for their own systems, but those of their customers.
Direct Edge, for example, has launched EdgeRisk Ports, a risk mitigation service which offers market participants dedicated “test ports” to evaluate the readiness of their systems that connect to the EDGX and EDGA exchanges.

The optional service permits only designated test symbols to be transmitted to the production environment. This provides a rigorous simulation of exchange conditions while eliminating the risk of a live order executing during testing.

EdgeRisk Ports is a powerful risk mitigation tool for ensuring that trading software and infrastructure upgrades perform as intended, the company said.

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