Financial markets, now heavily dependent on technology, need to be safeguarded against cyberattacks, natural disasters and the more prosaic scourge of human error that can cause massive disruptions, according to experts and a federal panel.
In March 2012, a software error forced the equities exchange BATS to cancel its own initial public offering. Two months later, the IPO of Facebook was delayed when Nasdaq had trouble with its stock trading system. In August 2012, Knight Capital lost money when technology problems with trading software led the firm to submit unintended orders for New York Stock Exchange securities. Also last year, Superstorm Sandy led to a two-day closure of the NYSE and Nasdaq. And always looming is the threat of a cyberattack that could disrupt securities trading, erase financial records or even steal assets.
To combat these types of high-profile snafus of the past year, the Financial Stability Oversight Council's 2013 annual report lays out suggestions for protecting markets and people's money from technology failures. [...]
To make securities trading more secure, the oversight council proposes:
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.
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."