The Securities and Exchange Commission voted 5-0 Wednesday to require routine testing of exchanges' trading systems. The exchanges also will be required to notify the SEC about problems, including any systems that are compromised by hacking. Any problems must be quickly corrected.
The SEC action follows a series of technical disruptions in recent years — notably the "flash crash" of May 2010 — that regulators say shook investors' confidence in the markets.
The rules take effect in mid-January. They will replace a 20-year-old voluntary program for U.S. exchanges, which include the New York Stock Exchange, Nasdaq and a host of competing electronic marketplaces.
They are intended to reduce the chances of technology problems occurring and to put exchanges in a strong position to deal with them if they occur. As markets have become faster and more technologically advanced, they also are prone to more technical failures.
"Failures must be minimized and, when they occur, they must be remediated as quickly as possible and promptly reported" to the SEC, agency chair Mary Jo White said before the vote. "Investors should expect no less of the world's premier securities markets — indeed, investor confidence depends on it."
The most stunning disruption came in the May 6, 2010 "flash crash," which regulators later determined was triggered by a computerized selling program. In panicky trading, the Dow Jones industrial average plunged hundreds of points in minutes before it eventually closed 348 points lower.
Regulators say that episode and others in recent years — including the technical glitch on the Nasdaq Stock Market that delayed Facebook's debut as a public company in May 2012 — showed that investors can be put at risk when technology fails and confidence in the markets can be damaged.
The markets have become increasingly complex and high-frequency trading, which uses computer algorithms to buy and sell stocks in milliseconds, now accounts for a majority of stock trading volume. The high-frequency trading firms look to get a jump on competitors by using computers to rapidly analyze market data and exploit split-penny price differences.
Regulators have put the ultra-fast trading systems under close scrutiny. Earlier this year, White outlined new proposed rules that would, among other things, curb aggressive short-term trading tactics when the market is especially volatile. Another federal agency, the Commodity Futures Trading Commission, has been moving toward reining in high-speed trading.
And the FBI has confirmed that it has been conducting criminal investigations of high-frequency trading firms.