Kill switch design worries

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The idea of a kill switch that would simply shut down trading by specific firms has been in vogue since August, when the Knight Capital trading fiasco stuck the firm with $440 million in losses over just 45 minutes.

The very next month, a working group put together by the SEC recommended that kill switches be set up to make sure rogue programs aren't allowed to run wild again. Most people agree with to the concept in theory, but there are lots of particulars that have to be worked out.

Traders magazine notes that exchange members have some issues. "Although the exchanges are considering a 'layered ' approach, whereby a brokerage receives alerts before a complete shutoff, the Securities and Exchange Commission appears to favor a more abrupt solution." 

It continued, noting that, "Chairman Mary L. Schapiro, at a roundtable on market stability last month said that, in automated trading, orders need to be shut off within two minutes, roughly, to be effective. And while the brokerage houses themselves will be permitted to determine the thresholds that would determine the point at which the exchanges would cut off their orders, some brokerage executives worry those thresholds will be set too liberally to be of any use."

One big issue is whether and how members would be notified when the exchange intended to flip the kill switch. Firms are concerned certainly about improper or at least overly hasty decisions to cut off their trading. Lots of questions arise, including: What are the thresholds that would allow the exchange to invoke a kill switch? What would be the exact sequence of events? Would the member be able to protest the decision?  How would trading be brought back on line?

These are hardly insurmountable hurdles. At the same time, it should be noted that the likelihood that a kill switch will be used would be reduced greatly if quality assurance were enhanced at the code level. Hopefully, the trading community will not lose sight of that related goal.

For more:
- here's the article

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