* SEC examiners asking brokerages questions on technology
* First leg of SEC exam process started in June
* Second leg of exam began after Knight glitch in August
* Results will help SEC in policymaking on automated trading
By Sarah N. Lynch
WASHINGTON, Sept 26 The U.S. Securities and
Exchange Commission has launched a broad review into technology
issues at major brokerage firms, specifically looking at whether
they have proper controls to address errors, people familiar
with the matter said on Wednesday.
The SEC's review was prompted by a string of recent events,
including a software glitch at Knight Capital which led
to a $440 million trading loss, nearly bankrupted the firm and
sent the market-maker scrambling for investors.
The SEC's examinations staff has sent out two batches of
questionnaires to a sampling of brokerages asking for detailed
information surrounding their automated systems for order-taking
and order processing, these people said.
The SEC's new risk-targeted exams, which were reported
earlier on Wednesday by the Wall Street Journal, are designed to
help the agency better understand how brokerages make and
implement technological changes, prevent problems from
happening, and how they remediate glitches that may arise.
The results of the exams will be used to help inform SEC
policy but could potentially lead to enforcement actions.
One thing regulators are expected to explore is whether or
not brokerages should all be required to have "kill switches," a
mechanism that can be used to quickly shut down trading before
Next Tuesday, the SEC is convening a roundtable to discuss
technology issues and how to prevent problems like the one
experienced by Knight Capital. Kill switches are likely to be
among the topics debated.
The SEC's examinations could also lead the SEC to issue an
exam alert to help promote compliance more broadly throughout
The agency's decision to start a review into brokerages'
automated systems first came in June -- about two months before
The first batch of questionnaires, sent to roughly a dozen
brokerages, focused mostly on learning what policies and
procedures firms have place to comply with the SEC's new "market
That rule, which took effect last year, requires brokers to
put in place risk control systems to prevent the execution of
erroneous trades or orders that exceed pre-set credit or capital
Separately, the SEC has also been looking to see if Knight
was in compliance with the new market access rule when its
trading error, which has been blamed on a software problem,
In August, after the incident at Knight Capital, the SEC
decided to start a second leg of the exam process focused more
on technology and governance.
The agency then sent out a second batch of questionnaires to
roughly the same number of brokerages. Responses are due in
mid-October, these people told Reuters.