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Safeguards for Trade Malfunctions: As Much About People as Technology

By Deborah Prutzman, Regulatory Fundamentals Group | Tuesday, October 16th, 2012

On Tuesday, October 2, the SEC held a roundtable discussion in Washington D.C. focused on technology use within the investment management sector. The following article from our guest blogger, Deborah Prutzman of the Regulatory Fundamentals Group, offers some highlights and insights from that meeting.
The 2010 Flash Crash, the securities and exchange commission logoKnight Capital incident, the Facebook IPO and the BATS IPO were all rooted in technological failures. An SEC roundtable held on October 2, 2012 at the SEC headquarters in Washington discussed ways to prevent future incidents like these from occurring again. 

The roundtable gave a “thumbs up” to the adoption of a “kill switch” and focused on a number of best practices that are likely to find their way into managers’ procedures and investors’ due diligence questionnaires. Perhaps the most important takeaway, however, is that the role of the technology team, and that of the CTO, will continue to grow in importance.
A related development—that indicates safeguards for trade malfunctions are as much about people as technology—was the emphasis placed on enterprise-wide training and communication. Panelists noted that the Knight Capital incident was actually the result of two problems—a technology malfunction and the failure to respond effectively to that malfunction. Any system that notifies a firm of a trading error, or even halts trading, will only be effective if the firm has a process in place to implement once the issue has been identified.

Those attending the SEC program discussed the need to have two well-coordinated crisis management teams:


  1. One composed of IT experts to address the technical issues; and

  2. Another made up of senior management (that includes compliance) to guide the overall process and address internal and external communications, including contact with regulators and investors.

In addition, participants discussed how clarity about underlying business processes and related documentation set the stage for more effective and efficient system design, the creation of targeted testing protocols and highly effective crisis planning and management. The topic of kill switches received extensive attention. Many participants expressed skepticism about a fully automated kill switch mechanism that takes too much control away from a trading firm and various exchanges.

Roundtable participants concurred that this objection can be mitigated by setting warning thresholds prior to triggering a kill switch in order to give market participants the opportunity to have human consultation and intervention before an automated kill switch would be activated.

Key Meeting Theme

Technology is great, and robust technological solutions are needed for trading systems. But in the end, an experienced and trained staff is both the first and the last line of defense.
hedge fund regulations knowledge centerIf you are interested in learning more about the SEC Roundtable on Technology and Trading, please send a request to:

Also, for more information on regulations affecting the investment management industry, check out the Hedge Fund Regulations Knowledge Center and don't miss these recent Hedge IT articles: 



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