The interconnectedness of the trading infrastructure requires more safeguards at the system level.
“When you look at changes in the landscape, with more systematic trading and more problems related to automated trading, the industry has to step up and start taking responsibility,” said Joshua Walsky, chief technology officer at trading software provider Broadway Technology. “One of the ways to do that is for the platforms working with the people who connect to them to come up with joint schedules that are safe.”
Joshua Walsky, Broadway Technology
Over the past year, the SEC and CFTC have stepped up pressure on operators of trading venues to implement circuit breakers and other mechanisms to prevent wide scale disruptions.
Self-regulatory organizations (SROs) for the equities and options markets have been working with the SEC on their collective plans to strengthen the resilience, performance, disaster recovery capability and governance of the critical infrastructure of the U.S. capital markets, including the Securities Information Processors (UTP, CTA and OPRA).
The SROs have come to general agreement on recommendations and preliminary implementation timetables in response to the September 12, 2013 meeting between leaders of the equities and options exchanges, FINRA, DTCC and Options Clearing Corporation and SEC Chair Mary Jo White.
The recommendations address broad areas such as critical infrastructure, trading halts, trade breaks and kill switches.
“Platforms need to work with those who are connecting with them to address that,” Walsky said. “It’s not just about one entity testing its own systems. As computer systems connect to each other, there’s a broader responsibility to test with those you connect to. What NYSE did for the Twitter IPO was significant. They put out a press release saying they were going to keep their auction system open over the weekend to allow others to test. That was obviously a direct response to the Facebook IPO.”
NYSE has submitted a proposed rule change that would allow members to facilitate blocking of a member’s orders if certain thresholds were met. The tools are designed to act as a backstop for member organizations’ risk controls by providing them with the ability to take action to more effectively manage their risk levels with respect to orders at the exchange.
Most market participants support kill switches that permit market centers to terminate a firm’s trading activity if such activity was posing a threat to market integrity. But there are also concerns that firms would be reluctant to systemically cut themselves off from the market and therefore, any kill-switch-triggering threshold would be set by the firm at a conservative level.
In its filing, the NYSE said that its risk management tools seek to balance these conflicting viewpoints by providing risk monitoring services that grant discretion to the member organizations to define pre-set risk thresholds.
The risk management tools will provide member organizations with the ability to segment activity into risk groups and to monitor exposure in real time as trades execute.
Member organizations may also take certain actions in response to an unwanted buildup in risk levels, such as bulk blocking or bulk cancelling orders by risk group. Additionally, member organizations may define risk limits that may be adjusted intraday and elect to have the exchange take action based on these pre-set limits, such as sending alerts as exposure limits are approached and breached or automatically blocking orders upon a breach.
