Published July 18, 2013
NEW YORK – U.S. regulators are taking a deep look at automated trading firms to determine whether adequate risk controls are in place to prevent major technology glitches or at least minimize their impact.
The Financial Industry Regulatory Authority said on Thursday it sent out targeted examination letters to 10 high-frequency trading firms this week asking for detailed information on the testing and supervision of trading algorithms and other software.
FINRA also asked the firms to describe any instances in which they had a malfunction with an algorithm or trading engine that had a major financial impact to the firm or caused a market disruption.
"This sweep is part of our effort to take a deeper dive into the area of technology controls given the increased reliance on technology," said FINRA spokeswoman Nancy Condon.
FINRA said in January that it planned to take a closer look at high-frequency trading practices this year following a software glitch at automated trading firm Knight Capital Group last year.
The glitch caused thousands of unintended trades, rattling the stock markets, costing Knight $461 million, and leading to the firm's sale to rival Getco LLC for $1.4 billion. The combined company is now called KCG Holdings Inc .
The incident was one of several high-profile technology problems that jolted the securities industry last year. Others included the failed initial public offering of stock exchange BATS Global Markets, and Nasdaq OMX Group's botching of Facebook's market debut.
The U.S. Securities and Exchange Commission announced a technology roundtable just two days after the Knight glitch, and former Chairman Mary Schapiro asked SEC staff to speed up efforts to propose a rule that would set industry-wide standards "to ensure the capacity and integrity" of market systems.
New rules were proposed in March.
(Reporting by John McCrank; Editing by Lisa Shumaker)