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Are "Kill Switches" the Answer for Exchanges?

An expert says exchanges must focus on policies and procedures and make sure their systems failover to a previous version, rather than stop trading.

Last week, exchanges were summoned to Washington, D.C. to discuss the market infrastructure after Nasdaq’s outage on Aug. 22 led to a three hour trading halt when it’s securities information processor (SIP) suffered a technical failure.

SEC officials asked US stock and option exchanges to create “kill switches” that would enable them to shut down trading when technological failures occur.

In general, exchanges were given 60 days to work on a number of measures toward improving market resiliency.

But are kill switches the right remedy for exchanges? Or should trading halts be avoided by exchanges?

One expert contends that first the emphasis should be on policies and procedures, so that exchanges have the ability to rollover trading to a back up system or another venue, before they shut down trading. “We live in a highly automated world and mistakes are going to happen. It’s what happens when a mistake happens,” says John Edge, Managing Director, Capital Markets and Business Development at NICE Actimize, the financial crime, risk, and compliance solutions provider.

One of the homework items the SEC assigned exchanges is to come up with an action plan showing testing and disclosure protocols when they make system changes for their securities information processors (SIPs), which disseminate stock quotes and other data. “The complexity of this work is Nasdaq can make a change in some of their technology. That’s fine and normal. However, there are other technologies it interacts with,” says Edge.

In Nasdaq’s case, the problem wasn’t the risk of trading too much, says Edge. It was that a piece of infrastructure failed and it couldn’t be rolled back to a previous version and start working. “It took three hours and it really should take 3 minutes and even three minutes is a long time,” says Edge.

“What’s needed are thorough processes and procedures and the ability to roll back to a previous versions. Everyone should be reviewing their processes by which they release technology and going over disaster recovery,” said Edge.

On Sept. 4th Nasdaq experienced a six-minute outage in one of six of the quote dissemination channels, specifically in symbols PC through SPZ. The issue was promptly resolved. Trading systems were not affected, and the market closed at the end of the trading day in an orderly manner, according to Nasdaq’s statement.

Edge contends that a “kill switch” at the exchange level doesn’t make sense. It also doesn’t make sense that if Nasdaq goes down, that other markets fail to function and trade the same security, since that’s the reason why we have Reg ATS for alternative trading systems. But in the heavily interconnected marketplace, there are bound to be technical issues, he says.

Edge says questions should be asked about how our market centers operate, and are they built if one goes down to still function properly? “Why would you have to kill trading on Nasdaq? “he asks. “If for some reason Nasdaq couldn’t operate, you’d want to a well coordinated transfer of responsibility to other venues,” says Edge.

Ivy is Editor-at-Large for Advanced Trading and Wall Street & Technology. Ivy is responsible for writing in-depth feature articles, daily blogs and news articles with a focus on automated trading in the capital markets. As an industry expert, Ivy has reported on a myriad ... View Full Bio

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