U.S. regulators required stock exchanges to show they canprevent technology disruptions under new rules intended to limitthe frequency of malfunctions that have undermined investorconfidence.

The Securities and Exchange Commission (SEC) voted unanimouslytoday to approve rules that will cover the Nasdaq Stock Market, theNew York Stock Exchange (NYSE), and venues operated by Bats GlobalMarkets Inc., as well as dark pools including those owned by CreditSuisse Group AG and UBS AG. The SEC will separately considerexpanding the rules to brokers, such as Citigroup Global MarketsInc. and Citadel Securities LLC, that fill orders themselves awayfrom exchanges.

“We need to address any regulatory gaps that exist for marketparticipants whose systems would have a significant market impactif they were disrupted,” SEC Chair Mary Jo White said at today'smeeting.

The revisions will mark the first update in 23 years ofvoluntary technology standards that were put in place after theOctober 1987 market crash known as “Black Monday.” White vowed tomake them mandatory after the August 2013 failure of Nasdaq'ssystem for reporting quotes and prices caused a three-hour tradinghalt.

Former SEC Chairman Mary Schapiro made a similar promise afterthe May 6, 2010, flash crash, when the Dow Jones Industrial Averagesuddenly dropped 9.2 percent before recovering.

The new rules, known as Regulation SCI, require exchanges toconduct tests to ensure they have adequate backup systems to endurenatural disasters and terrorist attacks. Exchanges would have toinform the SEC of significant disruptions within 24 hours andprovide regulators with a written report of what caused it. Therules include a safe harbor to shield executives from liabilitywhen they can show they followed their internal policies.

Twelve dark pools, broker-owned competitors to exchanges thatdon't publish quotes, will also have to comply under the rulesapproved today. Alternative trading systems for corporate andmunicipal bonds are not subject to the rules.

Eric Ryan, a spokesman for NYSE, said the rules are a “firststep” in improving technology at trading centers.

“We agree that technology should be implemented in a way thatprotects investors, minimizes market disruptions, and makes thedevelopment process more consistent,” Ryan said in a statement.

Jim Gorman, a Bats spokesman, said the company “supports thepolicy goals” of the rule. Robert Madden, a Nasdaq spokesman,declined to comment.

SEC Commissioner Daniel Gallagher, a Republican, said today thatexchanges already have incentives to prevent technologyfailures.

“No exchange wants to mishandle an IPO,” Gallagher said.

Knight Capital

White said the agency will separately consider whether the rulesshould be applied to brokers, which have had similar technologymalfunctions. Knight Capital Group Inc. lost $450 million in August2012 when a software error caused the firm to enter millions offaulty trades in less than an hour.

Intercontinental Exchange Inc.'s NYSE and Democratic SECcommissioners Luis Aguilar and Kara Stein pushed for extending therequirements to wholesale brokers that fill orders away fromexchanges, citing failures such as Knight's.

“Around $14 trillion worth of equity trades are ignored byRegulation SCI,” Stein said today before voting for the measure.“We should be doing more in this rule. I am disappointed in thismissed opportunity because so many important trading centers areleft out.”

While Aguilar agreed that the rules should have covered brokers,he highlighted support for other provisions, such as greaterresponsibility for exchange executives. A senior manager will haveto review the company's annual report of compliance with the rules,he said.

“I am optimistic that Chair White's direction to the staff todevelop recommendations to expand Regulation SCI's reach toadditional market participants will be acted upon promptly in orderto make a future 'flash crash' or Knight Capital debacle lesslikely,” he said.

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