With respect to testing, a firm's ATS testing standards could require it to test an ATS on the trading platform(s) where it will trade, prior to deploying such ATS into the live environment. Such testing standards may reduce the incidence of technical errors at the level of individual algorithms and firms. In addition, a firm's ATS testing standards may require it to test an ATS on the trading platform(s) after modifying the underlying algorithms or other system components to a degree subject to further definition. ATS testing could include tests against historical data, especially periods for which the relevant algorithm would likely have been stressed, or would have been active during periods with unanticipated market activity. In addition, exchanges could also be required to provide a test environment to simulate production trading so that market participants can conduct exchange-based conformance testing, which would include tests of compatibility with the matching engine (including initiation and cessation of the ATS connection) and verification of risk controls required by the trading platform.
The Commission is particularly interested to understand when it is most beneficial for firms to test an ATS after it has been modified. Some have asserted that the amount of testing should be calibrated to the significance of the change and the risk it poses to the proper function of the ATS. /96/ The Commission would like to better understand how market participants estimate the significance of a change and the risk that a given change might pose to the proper function of an ATS. Also, the Commission would like to understand what current best practices are for testing ATSs and how those practices are tailored to the extent of the modification.
FOOTNOTE 96 See SEC Roundtable Transcript, supra note 2, at 49-51. END FOOTNOTE
56. Please describe the necessary elements of an effective ATS testing regime, in connection with both the initial deployment and the modification of an ATS.
57. With respect to testing of modifications, how should the Commission and market participants distinguish between major modifications and minor modifications? What are the objective criteria that can be used to make such distinctions? Should any testing regime applicable to ATS modifications distinguish between major and minor modifications, and if so, how?
58. What challenges or benefits may result from exchanges implementing standardized procedures regarding the development, change management, and testing of exchange systems? Please describe, if any, the types of standardized procedures that would be most effective.
b. ATS Monitoring and Supervision
The Commission is aware that many exchanges and software design firms offer extensive testing platforms to validate algorithm functionality before deployment in a live trading environment. The Commission wants to better understand the extent to which testing is utilized and would like to better understand the methodology supporting these test environments. Further, the Commission believes that many, if not all, firms operating ATSs have human monitors supervising ATSs when they are operating. However, the Commission is uncertain to what degree such monitors have been sufficiently trained in how to respond to unexpected problems, and been given the requisite authority to intervene at these times. /97/ A firm's ATS training standards could require that relevant staff members be able to understand how to identify malfunctions, evaluate the risk resulting from those malfunctions, and respond constructively to those malfunctions, including elevating the problem to the attention of more senior personnel. The Commission would like to better understand whether regulatory measures or new standards in this area would promote more effective ATS monitoring and supervision.
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