Experts mull 'kill switch' for stock-wrecking techno-blunders
Markets need a cure for Facebook IPOcalypses
Technology and market experts reckon it's a good idea to design "kill switches" to stop computer glitches from causing chaos with stocks, à la Facebook's IPO, but said they better be well-designed.
The markets have been plagued by a number of high-profile cock-ups, including the crazy day of Facebook's first stock offering, when the debut was delayed for hours in the morning and then the computers couldn't tell brokers if or when they'd bought or sold stock or for how much.
In response, the US Securities and Exchange Commission brought together some tech and brokerage talking heads on Tuesday to figure out how to failsafe market systems.
"I think kill switches are important, but we need to ensure that we don't think of them as the big red easy button," said Anna Ewing, chief information officer at Nasdaq OMX. "It is layered. It is complex."
The NASDAQ, which was the world's first wholly electronic stock market, has a particularly big stake in inspiring confidence in market software systems, as it was responsible for Facebook's IPOcalypse.
Mary Schapiro, chair of the SEC, pointed out that the biggest problems, like Facebook delayed IPO and Bats Exchange's cancelled IPO, have been caused by basic software errors, not complicated tech issues.
“Both events involved one of the few single-exchange processes that remain in an otherwise fragmented market: namely, building a single order book and crossing trades at a single price to open trading for a new public company," she said.
"These single exchange problems are not a result of complexities or fragmented markets, but rather a result of more basic technology 101 issues.”
Chris Isaacson, COO of the Bats Exchange, said that a single line of code in the new software for the launch of its corporate listings business was the error that led to the cancellation of its IPO in March, despite development and testing for over a year.
The top fix proposed by the experts was the introduction of kill switches that could be flicked by exchanges to block a broker if they spotted a potential error like abnormally high volumes, but most of them saw it as just a short-term solution.
The problem with current kill switches is that they are at individual markets' discretion, instead of being an overview of the state of all markets, the preferred long-term solution. The experts want the Depository Trust and Clearing Corporation to do the monitoring, if they can get markets to give it real-time data from all clearing firms.
Apart from stopping or messing up IPOs, software glitches can also lead to "flash crashes" that tumble or greatly inflate stocks. The latest of these was just last month, when new software trading firm Knight Capital triggered old dormant code, which started ordering stocks to be bought or sold with unrestricted limits.
Brokerages and investors now move at lightning speed with algorithmic trading - automatic buy and sell orders when stocks reach certain prices or quantities. So one mistake can trigger a cascade of trades that wipe out or drastically inflate company value. ®
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