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5 steps to improve the financial system

Manage operational risk
Manage operational risk © QUAN ZHENG/Shutterstock.com

Given the growth of automated and computerized trading strategies, the FSOC warns that regulators and the private sector need to address operational risks, improve internal controls and ensure proper governance of banks, securities firms, trading platforms and clearinghouses.

Last year saw a number of trading controversies involving stock markets. In May 2012, Facebook's initial public offering experienced trading delays and errors, spawning a $10 million fine against Nasdaq along with dozens of investor lawsuits. In another incident, high-frequency trader Knight Capital Group triggered circuit breakers in August 2012 through a series of unintended orders ultimately blamed on a technology glitch.

Each example highlights the dangers posed by trading dominated by software programs that take cues from share prices and trading volumes rather than individuals making rational decisions. They also expose the vulnerability of markets to deliberate cyberattacks, natural disasters and future technology failures.

"Trading activity is becoming more dispersed and automated, raising concern among council members about operational failures," Lew testified.

In March, the SEC proposed the first update of automation rules implemented in the wake of the October 1987 market crash, aiming to strengthen internal controls, require system audits and ensure that entities can quickly become operational again after natural disasters like Superstorm Sandy.

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