US stock exchanges have agreed to measures intended to improve the resiliency of critical trading systems following the recent three hour Nasdaq outage, including introducing a “kill switch” to enable trading to be shut down in the event of a technology failure.
A meeting between Securities and Exchange Commission (SEC) and a number of stock exchange executives on Thursday resulted in an agreement to develop plans for when failures occur on trading systems.
The meeting was held in response to the events of August 22, when Nasdaq’s securities information processor (SIP) was overwhelmed with messages from rival exchange NYSE’s Arca system, resulting in a three hour halt to trading. Nasdaq OMX subsequently explained that the ‘unprecedented’ influx of orders revealed software flaws in its own systems which prevented backup systems from failing-over properly.
A number of exchanges have now agreed to work with the regulator to “enhance the integrity of market systems,” said SEC chair Mary Jo White.
“Today’s meeting was very constructive. I stressed the need for all market participants to work collaboratively – together and with the Commission – to strengthen critical market infrastructure and improve its resilience when technology falls short. To that end, I asked those at the meeting to work constructively with the Commission staff as we continue to consider ways to enhance the integrity of market systems.
"They pledged to do so and I expect other market participants will do so as well."
One of the major commitments will be to implement ‘kill switches’ that would make it possible for exchanges to shut down trading technology failures.
Other measures involve implementing an ‘action plan’ to establish better testing standards for SIPs, introducing protocols around communicating problems when they arise, as well as reviewing the stability of other key trading infrastructure.
The regulator is intent on tightening trading system rules in order to mitigate the risk of further outages, following a number of IT related failures which have affected exchanges and trading firms. Knights Capital was hit by a $440 million (£279m) loss following a software error last year, while Nasdaq has run to problems in the past, resulting in the botched Facebook IPO in May 2012.