SEC aims to tighten computer trading oversight

Elisse Walter, chairman of the Securities and Exchange

Elisse Walter, chairman of the Securities and Exchange Commission, said the agency wants to protect investors in orderly markets. (Feb. 14, 2013) Photo Credit: Bloomberg Andrew Harrer

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U.S. stock exchanges could be subject to tighter oversight of automated trading under a federal proposal that advanced Thursday.

The Securities and Exchange Commission voted 4-0 to seek comment on rules that would require routine testing of trading systems. The exchanges would also be required to notify the SEC about problems, including systems compromised by hacking. Any problems would have to be quickly corrected.

The proposal follows several cases where technical glitches disrupted trading. Stock trading now relies heavily on computer systems that exploit split-penny price differences. Automated programs can trade stocks in fractions of a second.

The rules would replace a voluntary program that most U.S. exchanges participate in. The public has 60 days to comment on the rules, after which the SEC can adopt them.

The changes would be "instrumental in our efforts to bolster investor confidence, protect investors and maintain fair and orderly markets," SEC chairman Elisse Walter said before the vote.

So-called high-frequency trading is estimated to account for more than 50 percent of all U.S. stock trading.

As markets become faster and more technologically advanced, they are also prone to more technical failures.

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In August, a software glitch at trading firm Knight Capital sent erroneous orders to the New York Stock Exchange. The result was 45 minutes of volatile trading and a loss of $440 million for Knight, which at the time oversaw trading of 524 stocks on the NYSE.

In May, a technical glitch on the Nasdaq Stock Market delayed the highly anticipated debut of Facebook as a public company. Some investors didn't learn for hours whether their trading orders went through.

And a computerized selling program was determined to have triggered the May 6, 2010, "flash crash" that sent the Dow Jones industrial average plunging nearly 600 points in five minutes.

In response to the flash crash, the SEC has established rules to halt trading when the market swings dramatically.

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