UK trading sector faces challenges as US regulator prepare rules

UK trading firms will have to make their trading software more resilient to ensure they comply with the imminent regulations being put together by the US SEC.

The US SEC is in the process of finalising new regulations for the trading sector, which will introduce measures to prevent software failures that have blighted the US trading industry an apply to any organisations trading with US organisations. Recent weeks have seen crashes at Bats, the Eurex derivatives exchange and NASDAQ. Last year a public glitch was seen when a computer problem at the NASDAQ delayed Facebook’s IPO, and the trading exchange was fined $10m by the SEC.

The regulation could include a rule that means all incidents regardless of significance have to be reported. Trading exchanges, for example, have small outages that are never made public. Another possible introduction is a rule stating that companies that are linked have to complete joint testing.

The complex nature of interlinking systems from a plethora of organisations in the capital markets create many points of failure. Outages can be costly to participating organisations as well as investors, and there are economic repercussions for nation states.

There were lots of glitches back in 2011 at the height of the battle between exchanges to be the fastest. Large investment firms use algorithms to automate huge volumes of trading. Milliseconds (one thousandth of a second) and even microseconds (one thousandth of a millisecond) make a huge difference to these trading companies that want to make trades before prices change even slightly. Trading exchanges now measure end-to-end trading times, from placing an order to completion, in microseconds.

The SEC is reviewing comments from the industry on its prosed regulations. Any company trading with US organisations, which is most in the UK, must abide by the EC regulations. Like the US Foreign Account Tax Compliance Act (FATCA) regulation, which forces financial organisations outside the US to report their US-citizen customers that have assets with them to the IRS, the SEC trading regulations impact non-US trading firms, if they trade with US organisations.

Rik turner, analyst at Ovum, said the number of glitches of late has been embarrassing for an industry sector “trying to be a serious part of the economy.”

“Regulators have been threatening over the reliability of computer systems and are taking steps to ensure they improve and they will impose penalties if there are problems.” added Turner.

Turner said if exchanges have to report all outages regardless of size there will be a significant overhead. “The potential headache for someone like the NYSE and NASDQ to report every incident could be huge.”

Lev Lesokhin, business technology executive at software testing company Cast, said that exchanges are good at testing but need to focus on software engineering design and analyse software structurally. “There are lots of complex systems that interface. When pieces come together they may not work as effectively as they should."