Market standards and the warm embrace of regulators

On 30th October the CFTC held a Public Meeting of the Technology Advisory Committee. Among other things, the possibility of a new Quality Management System Standard for automated trading was discussed. The AT 9000 standard is aimed at market system quality for automated trading in the financial industry. A preliminary timeline tells us that an informal working group started in July this year and indicates that the AT 9000 standard could be in place as early as the end of 2013.

Standards are important tools to signal quality to clients or business partners. The famous ‘Market for Lemons’ paper written by the American economist George Akerlof in 1970 shows that the used car market could not function if there was no such thing as the quality certificate to reject the ‘lemons’ and pick the winners. Especially in industries with complex processes and products, a quality certification can reduce the efforts of testing by every client separately.

Interestingly, while proprietary trading boutiques don’t have clients because they trade with their own money, all of them, as well as brokers and vendors, are very concerned about compliance. The important question is whether or not the regulators will embrace a new quality standard. Unfortunately, Self-Regulating Organisations (SROs) themselves are currently under public scrutiny so it remains to be seen what regulators have to say about a new industry-led solution. An application of AT 9000 all around the world would be good, but this might be difficult to achieve given the latest warnings by David Wright (Secretary General of IOSCO) regarding weak mechanisms for achieving global convergence. While there are undoubtedly some tricky steps on the road ahead, a warm embrace by the regulator on a global scale could do the trick and make the AT 9000 a real success.

Comments
2 Responses to “Market standards and the warm embrace of regulators”
  1. Toni Somorin says:

    It amazes me that one of the safe guards being advertised by AT 9000 is for software houses to ensure that algorithm behaviour has been verified, pre-release, under a variety of market stress conditions. Given that most exchange test markets disseminate below par market data quality and ISVs are constantly facing challenges in ensuring that testing is robust enough to cover all market scenarios, maybe it is also time for the regulators to mandate a certain quality of test market data from the exchanges.

  2. Anonymous says:

    On that note Toni you may have noticed that on the MiFID front the Parliament text Art 51(3) provides that venues will need to provide testing environments: 3. Member States shall require a regulated market to have in place effective systems, procedures and arrangements, including requiring members or participants to carry out appropriate testing of algorithms and providing environments to facilitate such testing.

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