The Securities and Exchange Commission (SEC) voted 4-0 to draft new rules governing the trades.
Regulation SCI, which stands for systems, compliance and integrity, would cement currently voluntary policies aimed to ensure companies have security and record-keeping policies in place to avert a sudden, dramatic drop in the market.
The rules would require frequent tests of the trading systems, and the SEC would have to be notified when any problems are found.
“Today’s proposal marks a significant step forward in ensuring the integrity of our markets and protecting investors, and I am pleased to be able to support it,” said SEC commissioner Daniel Gallagher.
In recent years, glitches in the trading software — which can pull off stock sales in fractions of a second — have caused market “flash crashes” where huge trading losses happen in a matter of minutes.
In 2010, the Dow Jones Industrial Average suddenly plummeted about 1000 points – or about $1 trillion in value – only to recover minutes later. Another mishap last year caused Knight Capital Group to lose $10 million per minute due to rapid buying and selling — almost pushing it into bankruptcy.
The markets are a collection of more “trading centers that are almost completely automated and dependent upon sophisticated technology and extremely fast interconnected systems,” said SEC Chairwoman Elisse Walter. “This, combined with the increased speed and capacity of automated systems, has contributed to an impressive surge of trading volume and message traffic.”
“While the benefits of technology cannot be overstated, this evolution has increased the complexity of the markets and presents challenges for market participants seeking to manage their information technology programs and ensure compliance with our laws and rules,” Walter said.
The SEC chairwoman previously talked about pursuing the new regulations, but Thursday’s vote marks the start of the formal process to propose them.
And while Commissioner Luis Aguilar ultimately supported the rule, he said that it has particular shortcomings that limit how much oversight and enforcement power the regulator truly has.
“I hope that the comments generated will help make this a better rule,” he said. “Today’s rulemaking is a positive step in addressing the systems challenges posed by large, automated, complex, and fragmented trading centers. As the country’s capital markets regulator, the SEC must be at the forefront of proactively addressing changes in our capital market structure.”
The commission says will publish a proposal in the Federal Register, which will allow public comment for 60 days thereafter.
UPDATE: The SEC sent the proposal to the Federal Register on Friday, though it probably will not be published for several days. It weighs in at 377 pages.