The role of exchanges in rogue code solution

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The notion that bug-ridden, poorly tested software powering algorithms has been pushed out onto the national market system is in vogue right now.

Given all the glitches, some of which were very costly, it's hard not to agree. Most of the discussion has focused on the QA efforts of the firms pushing out the code, and it makes sense that before the likes of Knight Capital pushes out new software, it ought to adequately test its code.

A host of other solutions have been proposed as well, such as a some kind of kill switch that can turn the software off before it wreaks havoc on the market. Traders magazine raises the idea that perhaps exchanges should play a greater role. As of now, most exchanges assume that the prices and orders that they receive from dealers are accurate.

Steve Crutchfield, Amex chief executive, was quoted saying that, "We don't reject them (the orders). I mean, who are we to say the price is wrong?"

Still, he "is uncomfortable with that policy. In April, Crutchfield called on other options exchanges to work together with the SEC to produce a policy that would allow exchanges to reject orders or quotes they deemed harmful to the marketplace."

In the end, there will not likely be a single solution but a series of solutions. Exchanges will be in the storm, and I expect some to come forward with services and processes that can mitigate the risks of rogue code. After the Facebook IPO fiasco, Nasdaq certainly understands the value of becoming a leader in this regard.

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