"We will always be revisiting rules after particular experiences,'' if there is concern about how the rules are working, chairman Schapiro told Traders Magazine at the annual meeting of the Securities Industry and Financial Markets Association here. "But I wouldn't say there is anything concrete planned," after the Knight incident.
A “large software bug” triggered “dormant" computer code to start emitting erroneous orders at the outset of trading on the first day of August, according to Knight chief executive Tom Joyce.
The flood of erroneous orders cost Knight $457.6 million and Knight’s shareholders 70 percent of their equity in the firm. A consortium of other market firms, led by Jefferies & Co., rescued Knight.
"While I know it was painful for Knight's shareholders and for Knight's management, there was not a good reason to socialize the losses from their technology mistakes broadly through the markets,’’ she said. “They needed to be able to bear those costs themselves.''
The “important message” from the Knight case, she told SIFMA’s members, “comes from the fact that when we said that the rules that govern when trades can be broken, the clearly erroneous rules, would stand and that we are not going to go beyond those rules and allow trades to be broken,’’ under other terms.
After the flash crash of May 6, 2010, the SEC proposed rules for exchanges that trades would be broken at specific percentages away from a reference price. These are part of single-stock circuit breaker provisions of national exchange ruless.
- For stocks priced $25 or less, trades would be broken if the trades are at least 10 percent away from the circuit breaker trigger price.
- For stocks priced more than $25 to $50, trades would be broken if they are 5 percent away from the circuit breaker trigger price.
- For stocks priced more than $50, the trades would be broken if they are 3 percent away from the circuit breaker trigger price.
"It's important for firms to realize this is serious stuff and that the use of technology, or misuse of it," Schapiro said, "can be a life-threatening experience.''
The Knight case had an “outsized impact” on the industry, leading trading firms, market makers and other participants to consider "what would happen to them if they had a Knight-type scenario.''
In a market technology roundtable held last month at the SEC’s headquarters, she noted, the industry came up with the idea of exchange-driven “kill switches” and other approaches to “fortify the market” against mistakes.