(Bloomberg News) More than five months before a software error ruined Bats Global Markets Inc.'s initial public offering, U.S. regulators put exchanges on notice that they need to do more to protect investors from technology gone awry.
The missive came in the form of a prologue to a Securities and Exchange Commission case against Direct Edge Holdings LLC in October over claims the exchange operator had weak internal controls that caused its trading system to fail.
The agency, working to avoid another event like the May 6, 2010, rout that erased $862 billion from equities in 20 minutes, decided to use the Direct Edge case to create a blueprint for actions against other exchanges, according to a person with direct knowledge of the decision. While the SEC didn't fault exchanges in the 2010 crash, the event magnified pressure on the commission to show it can ensure the fragmented marketplace of high-speed, computer-driven trading is safe for investors.
The 2010 "flash crash," as it has come to be known, spawned about 20 separate SEC investigations encompassing a dozen areas of possible securities law violations, according to the person, who spoke on condition of anonymity because the probes aren't public. While some of the investigations involve possible illegal trading practices, those that focus on exchanges revolve around whether the venues have the right compliance structures to address trading disruptions that could spiral out of control.
Daniel Hawke, chief of the SEC enforcement's market abuse unit, said "exchange conduct and compliance is an area of renewed enforcement interest."
Direct Edge spokesman Jim Gorman, Bats spokesman Randy Williams, Nasdaq OMX Group Inc. spokesman Robert Madden and NYSE Euronext spokesman Richard Adamonis declined to comment.