Written by Ryan Teckchandani
Edited by Sarah Mejia
Via a recent Wall Street Journal article “SEC Looks for the ‘Kill Switches’”, Jacob Bunge discusses many problems facing the SEC, including the technological mishaps of automated-trading systems. The SEC has been looking at the “details from major broker-dealers about the internal controls of their automated trading systems.” These automated trading systems involve buying and selling shares on exchanges and electronic-trading venue. The SEC is also looking into the malfunctions and, more specifically, how firms can override the computers and shut them off if required.
This is particularly important as the SEC is looking to restore confidence for investors in the marketplace. Ever since various scandals including Enron and WorldCom, the SEC has been working to decrease the credibility gap in the stock market, and it has certainly been a tall task. With the economic struggles of the past decade, it is very important that people continue to invest and have confidence in the stock market. The SEC now enforces the Sarbanes Oxley Act, a congressional law passed in 2002 in response to the Enron and WorldCom scandals; this law is designed to protect shareholders from fraudulent practices and accounting scandals.
In May of 2012, there were some technological problems in Facebook’s stock-market debut, frustrating the smaller investors. More recently, there have been some “high-profile breakdowns” including the trading activities at Knight Capital Group Inc. where flawed computer coding in the trading program resulted in a $440 million loss. The SEC has “gone into Knight, looked around, and said ‘this is what we need to know from everyone else.’” The SEC is trying to get a better understanding of the automated securities markets, and the organization wants to know who has responsibility over the development and testing of the computer-trading code. In addition, the SEC is reviewing how and when kill switches can be implemented to turn off trading programs when something goes wrong.
What is alarming to me is the fact that Knight management did not seem to catch the error in computer coding. This was a very serious mistake costing the company millions of dollars, and there should have already been precautionary measures to both detect these errors and determine what should be done when an error occurs. I think that firms should be more careful as trading becomes automated because this involves more risk, and the companies should have waited until automated trading becomes more reliable. Just as the lack of commitment of the board of directors of Enron did, the lack of management implementing proper procedures has a left a mess that the SEC has to clean up. Unfortunately, it seems that something is always done after a catastrophe occurs rather than before. Sometimes it is easier to find improvements in retrospect, but this seems to have been a somewhat predictable series of events. Once something becomes automated, more things can go wrong, and management in these firms failed to address these risks.
The ethical issue here is if it is acceptable that Knight Capital Group, Inc. did not seem to monitor its trading system properly. This affected many people whom were not just at the company but also various investors as well. Companies have a false sense of security that problems will not occur as they did at Enron and WorldCom. This has lead to companies not spending enough money on risk management procedures, and important actions (such as implementing an automated trading system) are taken too lightly. Companies need to find the balance between ethics, business, and the law. Knight Capital Group, Inc. made a very weak attempt to follow the laws in this area and “ethics should guide behavior beyond the law” (Brooks 137). Instead, Knight Capital Group, Inc. believed that “law and ethics are one in the same when it comes to business” and this has cost the company hundreds of millions of dollars (Brooks 137).
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Brooks, Leonard J., and Paul Dunn. Business & Professional Ethics for Directors, Executives &
Bunge, Jacob. “SEC Looks for the ‘Kill Switches’.” WSJ. The Wall Street Journal, 26 2012. Web. 30 Oct 2012.