Markets fight snafus in securities trading

In June, SIFMA ran a training exercise of a simulated cyberattack with as many as 60 participants, including exchanges, financial firms and utilities. SIFMA also does an annual disaster contingency exercise where firms run their securities trading systems from backup locations.

"There are lots of resources and personnel dedicated to mitigating these risks," Price says.

But whether it's a natural disaster, attack or human error such as bad software coding, no system will prevent all disasters, says Wallace Turbeville, a former investment banker and senior fellow at the think tank Demos in New York.

"Engineering, by definition, has a certain degree of failure. The real problem of those risks is how they can be compounded. So much trading is done by algorithms," Turbeville says.

Slow down

Automatic securities trading, in the absence of human intervention, means when something happens, the problem can be replicated by market reaction. Turbeville says he'd like to see federal regulations that slow down order flow. But, he acknowledges, "You're trying to put a genie back in a bottle."

Former SEC Chairman Harvey Pitt says the Financial Stability Oversight Council's report offers useful ideas, and Regulation SCI provides a start on operational risk problems. But, he says, the real answer to operational risk will come from companies working together on solutions and doing it because their livelihood depends on it, not because of government regulations. Knight Capital was a case study. It went from being the largest trader in U.S. equities before its software malfunction to being acquired after the scandal.

Lauer says the Superstorm Sandy market shutdowns show how whole markets can lose when disaster planning faces a disaster and loses. U.S. markets will lose out in the international competition for business if they aren't seen as being stable, even in the face of disaster.

Firms need to run live trading from their backup sites more often to make sure they are ready to do it in a disaster. "To maintain our leadership position in the world, we need to be prepared," Lauer says.

Pitt, now CEO of Kalorama Partners LLC in Washington, D.C., says so far companies are "reluctant to acknowledge they have real vulnerabilities. People haven't asked the one crucial question: What can go wrong?"

In addition, figuring out how to eliminate those vulnerabilities is not always clear in a technological environment that is changing so fast. "The possibilities of what can go wrong are gargantuan, if not infinite," Pitt says.

Financial service firms have a responsibility to constantly look at how they can better protect their securities trading systems. "People are deluding themselves that their systems are impervious or better than they are," Pitt says.

Many experts agree on one thing: Reducing operational risks is crucial.

"The wealth of this country is tied up in our capital markets. If those markets are not secure … significant damage can be done." Pitt says.


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