Exchanges Outline Plan to Strengthen Securities Markets

Published November 12, 2013

| Reuters

U.S. stock and option exchanges said on Tuesday they reached a general agreement on how to strengthen securities markets after federal regulators ordered them to come up with new rules in the wake of Nasdaq's three-hour trading halt in August.

Exchanges including New York Stock Exchange operator NYSE Euronext and Nasdaq OMX said they had reached an accord on the timing and the nature of certain regulatory proposals, including rules designed to protect the securities information processors that disseminate quotes to investors.

Exchanges were given a soft deadline of 60 days following a Sept. 12 meeting at the Securities and Exchange Commission's headquarters in Washington, D.C. with SEC Chair Mary Jo White.

They were asked to come up with a series of reforms in five areas, including a kill switch to halt trading during disruptions and new testing and disclosure protocols for the securities processors, also known as SIPs.

Problems with a SIP were at the heart of the Nasdaq outage after a software bug clogged its ability to disseminate quotes.

Their announcement came as White spoke to members of the Securities Industry and Financial Markets Association in New York for the group's annual meeting.

She declined to comment on specifics, saying she has yet to see what the exchanges submitted. But she reiterated the importance of moving forward.

"We have made very good progress," she told the audience. "I am expecting today... some concrete steps to implement all of the five areas that we talked about."

The exchanges did not delve into specifics about their proposals, saying those would be presented in subsequent rule filings to the SEC and amendments to its rules governing securities trading in the national market system, or Reg NMS.

The proposals by the exchanges, known as self-regulatory organizations (SROs), will be subject to public comment and SEC approval.

SROs have legal responsibilities to self-police their markets to ensure members comply with federal regulations.

The exchanges and other SROs, including the Financial Industry Regulatory Authority and clearing houses Depository Trust & Clearing Corporation and Options Clearing Corporation, agreed on five areas to strengthen the market from a spate of technology failures that have rattled public confidence.

The SROs said their proposals would address the SIPs, critical infrastructure, halts and trading resumptions, trade breaks and kill switches.

The SROs and their committees that govern the SIPs compiled proposals designed to improve the operational resiliency of the processors, strengthen interoperability standards and disaster recovery capabilities related to them, and establish a clear testing framework.

The SROs also said they established a pathway to identify contingencies related to such critical areas as the open and close of the markets, the launch of initial public offerings and potential outages at the clearing houses, among other issues.

A series of glitches that hit the U.S. exchanges over the past 18 months revealed their growing vulnerability to operational risk, ratings agency Standard & Poor's said in September, and could trigger credit downgrades.

White said the glitches are of concern because they could harm investor confidence, and added that the exchanges should strive for "zero tolerance" when it comes to errors.

"Our objective has to be zero tolerance. I think we all know that technology is never going to be perfect," she said.

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