SEC Approves Rules to Strengthen Stock Markets Technology

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The Securities and Exchange Commission (SEC) approved new rules intended to strengthen the technology infrastructure of the stock markets on Wednesday.

The commissioners voted unanimously to adopt Regulation Systems Compliance and Integrity (Regulation SCI). The regulation requires certain market participants to develop and implement policies that would reduce system issues and improve resiliency when system problems happen.

The commissioners emphasized that the new regulations are needed given the numerous technical glitches that impacted the stock markets over the past years.

In 2012, the NASDAQ suffered a technical glitch during the initial public offering of Facebook Inc (NASDAQ:FB). During the same year, Knight Capital Group Inc. (NYSE:KCG) the algorithm on one of its marketing computers experience technical problem, which led to more than $400 million losses.

SEC makes a historic shift

In a statement, SEC Chairwoman Mary Jo White said, “The rules adopted today mark an historic shift in the commission’s regulation of the U.S. securities markets that will better protect investors by requiring comprehensive new controls for the technological systems that form the core of our current markets.”

White added, “The rules provide greater accountability for those responsible for our critical market systems, helping ensure that such systems operate effectively and that any issues are promptly corrected and communicated to market participants and the Commission.”

According to SEC, the Regulation SCI requires self-regulatory organizations, certain alternative trading systems (ATSs), plan processors and certain exempt clearing agencies to have comprehensive policies and procedures for their technological systems.

The Regulation SCI also provides a framework for those entities to take appropriate corrective actions when systems issues occur, provide notifications and reports to the SEC regarding the problems and changes to the systems.

They are also required to inform members and participants regarding the systems issues, conduct business continuity testing and annual reviews of their automated systems.

Some commissioners expressed concern

Commissioner Luis Aguilar said he supports adopting the new rules after the staff addressed concerns on issues related to minimum testing standards and personal accountability. He also expressed that concerned that the regulation does not cover broker dealers.

Commissioner Kara White was also concerned that broker dealers and many alternative trading centers were left out. She said, “I am disappointed in this missed opportunity because so many important trading centers were left out.” He added that the regulation disregarded intraday proprietary trading firms.

According to the SEC, Regulation SCI will be effective 60 days after its publication in the Federal Register. Entities subject to the new rules must comply with the requirements nine months after the effective date.

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