NYSE to open up facilities for testing ahead of Twitter IPO

By John McCrank

NEW YORK (Reuters) - NYSE Euronext said on Friday it would offer testing next weekend for trading firms planning to take part in Twitter's market debut, highlighting an industry-wide focus on risk controls after a spate of technology-related snafus in recent years.

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

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

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

NYSE said in the note to traders on Friday that in preparation for Twitter's market debut, firms could test their trading algorithms on October 26, when it would make available all of its production customer gateway connections for order flow.

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

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

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

TRYING TO BREAK THE SYSTEM

Preventing technology snafus, and how to better deal with glitches that do happen, was a major focus at a market structure conference held by the Securities Industry and Financial Markets Association (SIFMA) on Thursday.

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

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

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

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

Deliberately putting bad orders or code into the system in a testing environment allows the exchange to then test what would happen to the rest of its systems, helping it make better plans to 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 the drop in investor confidence to the increased media attention surrounding trading glitches.

The data shows that in equities, clearly erroneous trades - a proxy for system coding issues where capacity limits or order routing limits have been exceeded - are down 55 percent from May 2010, said Tom Gira, head of market regulation the Financial Industry Regulatory Authority.

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

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

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

The renewed focus on operational risk and having controls in place for when glitches do happen, comes after a software bug in August paralyzed thousands of Nasdaq-listed stocks market-wide for three hours. That happened just days after a technical problem at Goldman Sachs sent a flood of erroneous orders to the U.S. equity options markets. And on August 6, BATS Global Markets faced an outage that lasted nearly an hour.

(Reporting by John McCrank; Editing by Tim Dobbyn)