Get Ready for Reg SCI




In the wake of the Flash Crash, the Mini-Flash Crashes, stock exchange botching of IPOs, as well as the Knightmare on Wall Street, the Securities and Exchange Commission is readying a draft of Reg SCI (Systems Compliance and Integrity). While still in the draft stage, the intent is to ensure that all exchanges, dark pools, ECNs and clearing firms have mechanisms in place to test for security, as well as technical robustness of their systems. Reg SCI will be modeled after the Automation Review Policy that has existed since the 1987 stock market crash. SEC Chairman Elisse Walter broadcasted the SEC’s intentions surrounding Reg SCI in a February 19th speech to students at the American University School of Law.

In addition to Reg SCI the SEC is soon implementing two other market safety measures – the April 8th implementation of Limit Up Limit Down (LULD), and new and improved market-wide circuit breakers based on the S&P 500 instead of the DJIA. Note that LULD and these circuit breaker changes have been proposed several years back.

How long will it be before SCI is drafted, voted upon, and implemented? Your guess is as good as ours. After all, the SEC has been “looking into” issues such as dark pool regulation for years now, with no outcome to date. However, here is what you should know:

–          LULD will be 5% of the average price in the previous 5 minute period for stocks in the S&P 500, the Russell 1000, and certain ETPs. It will be 10% for all other listed securities.

–          Old market-wide circuit breakers were based on price action in the DJIA index, and were triggered at price declines of 10%, 20%, and 30% from the prior day’s closing price.

–          New market-wide circuit breakers are based on price action in the S&P 500, and the decline triggers have been reduced to 7%, 13% and 20%.

–          The new breakers have a 3:25pm cutoff.  Prior to 3:25pm, the 7% and 13% levels will trigger 15 minute trading halts, and a 20% decline will trigger a halt for the remainder of the day. After 3:25pm only a 20% decline will halt trading – for the rest of the day.

These changes were to take place on February 4th, but have since been pushed back to April 8th.

This morning we would also like to draw your attention to another recent SEC speech. Chairman Walters gave this speech just a few days ago, and we feel it is worthy of your reading. In this speech she discusses why the SEC must take unnecessary risks out of the marketplace for the benefit of investors. She talks of protecting a fictional Aunt Millie, much in the same way we frequently talk about looking after the needs of our own fictional Fred and Ethel:

Once upon a time, investments were made on the basis of personal relationships – handshake deals that sent ships to the Spice Islands, or built a factory for turning out cars.  In today’s more anonymous markets, where so much turns on Aunt Millie’s willingness to invest her hard-earned dollars in people she has never met and companies she knows only from their filings, handshakes are no longer enough.  We need another mechanism for inspiring that same trust.  And that trust must be justified.

That’s what we do.  We work to ensure that Aunt Millie has access to the information she needs to make truly informed investment decisions.  We work to ensure that she can buy securities in a fair and efficient marketplace.

We have the feeling Chairman Walters would do a darn good job as more than an interim head of the SEC. Instead, at present, we mostly hope that market reforms that the SEC knows are needed will get implemented quickly, and that under pending new leadership the SEC never loses its focus on protecting investors, especially when their needs conflict with those of “traders”.