NYSE to open up facilities for testing ahead of Twitter IPO

Reuters

By John McCrank

NEW YORK, Oct 18 (Reuters) - NYSE Euronext said onFriday it would offer testing next weekend for trading firmsplanning to take part in Twitter's market debut, highlighting anindustry-wide focus on risk controls after a spate oftechnology-related snafus in recent years.

The initial public offering of microblogging site Twitter isthe most highly anticipated since Facebook's IPO lastyear, when software problems at Nasdaq OMX Group resulted in a chain of events that market making firms said costthem a combined $500 million.

Before Twitter disclosed on Tuesday it would list on the NewYork Stock Exchange, analysts had said the Facebook IPO problemswould likely weigh against Nasdaq's chances of winning thelisting and the prestige that comes with it.

A date for the IPO has not yet been disclosed, but it isexpected before the end of November.

NYSE said in the note to traders on Friday that inpreparation for Twitter's market debut, firms could test theirtrading algorithms on Oct. 26, when it would make available allof its production customer gateway connections for order flow.

The Big Board operator said additional details would beprovided early next week, including registration details.

The Facebook incident was one of a number of high-profiletechnology-related problems that have roiled markets and weighedon investor confidence in recent years, placing a bigger focuson operational risk by regulators and market participants.

Nasdaq agreed to pay a $10 million penalty for the Facebookerrors, the largest amount ever levied against a stock exchange,and also voluntarily said it would pay up to $62 million tocompensate firms harmed in the May 18, 2012, market debut.

TRYING TO BREAK THE SYSTEM

Preventing technology snafus, and how to better deal withglitches that do happen, was a major focus at a market structureconference held by the Securities Industry and Financial MarketsAssociation (SIFMA) on Thursday.

The conference came one day after regulators fined tradingfirm Knight Capital, now part of KCG Holdings Inc, $12million to settle charges related to an error last year thatsent millions of unintended orders into the market.

The U.S. Securities and Exchange Commission said that at thetime, Knight did not have appropriate risk controls in place toprevent the errors and that the firm failed to conduct adequatereviews of the effectiveness of its controls.

Exchanges and brokers have been reexamining their approachesto testing the robustness of their systems, Eric Noll, head ofNasdaq's transaction business, said at the SIFMA conference.

"Not only conformance testing - does the software do what wedesigned it to do - but what happens to the software if we tryto break it?"

Deliberately putting bad orders or code into the system in atesting environment allows the exchange to then test what wouldhappen to the rest of its systems, helping it make better plansto react to such a situation, he said.

STOPPING THE BLEEDING MORE QUICKLY

Several trading firm executives at the conference said U.S.markets actually function better than ever, and chalked up thedrop in investor confidence to the increased media attentionsurrounding trading glitches.

The data shows that in equities, clearly erroneous trades -a proxy for system coding issues where capacity limits or orderrouting limits have been exceeded - are down 55 percent from May2010, said Tom Gira, head of market regulation the FinancialIndustry Regulatory Authority.

But the speed that automation has brought to the marketsneeds to be taken into account, he said at the SIFMA conference.

"What's different about today's market than, say, 10 yearsago, is that even if you do have less snafus, they are so muchmore amplified now than they were before and the challenge isnow, how do you stop the bleeding more quickly in such a quickmarket," he said.

There are thirteen U.S. equity exchanges, 44 alternativetrading systems, and a handful of other large non-exchangetrading venues competing for order flow that brokers connect to.

The renewed focus on operational risk and having controls inplace for when glitches do happen, comes after a software bug inAugust paralyzed thousands of Nasdaq-listed stocks market-widefor three hours. That happened just days after a technicalproblem at Goldman Sachs sent a flood of erroneous ordersto the U.S. equity options markets. And on Aug. 6, BATS GlobalMarkets faced an outage that lasted nearly an hour.

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