Pursuant to a congressional request, GAO provided information on: (1) stock exchanges' automated systems for correcting problem trades more expeditiously; (2) the extent to which exchanges tested those systems to ensure that they could process increased work-load volumes; (3) the impact of those systems on reducing the 5-day period needed to clear and settle stock trades; and (4) the Securities and Exchange Commission's (SEC) role in reviewing and approving those systems.

GAO found that: (1) four organizations developed and implemented computerized trade processing systems that enabled stock markets to compare and correct all trades within 1 day after the trade date; (2) while the systems have yet to perform under extreme work-load conditions, they have successfully processed problem trades within established time frames under normal conditions; (3) none of the four organizations conducted stress tests to simulate the behavior of systems and market participants in an operational environment with anticipated peak work-load levels; (4) system testing failed to provide complete assurance that the systems could process such work loads; (5) exchanges reported that they did not conduct such testing because it was extremely difficult to accurately predict and simulate the post-trade processing environment during stressful market conditions; (6) one organization overlooked critical systems development practices by not fully assessing system requirements and projecting future systems work-load needs; (7) although the automated systems reduced the stock comparison and correction process to 1 day, stock settlement still required 5 days; and (8) SEC took steps to help ensure that certain securities industry organizations established capacity planning, but SEC oversight in assessing automated systems remained superficial.

Status Legend:

Review Pending-GAO has not yet assessed implementation status.

Open-Actions to satisfy the intent of the recommendation have not been taken or are being planned, or actions that partially satisfy the intent of the recommendation have been taken.

Closed-implemented-Actions that satisfy the intent of the recommendation have been taken.

Closed-not implemented-While the intent of the recommendation has not been satisfied, time or circumstances have rendered the recommendation invalid.

• Review Pending
• Open
• Closed - implemented
• Closed - not implemented

Recommendations for Executive Action

Recommendation: The Chairman, SEC, should ensure that the New York Stock Exchange, the American Stock Exchange, the National Association of Securities Dealers, and the National Securities Clearing Corporation conduct complete stress tests to demonstrate that their trade comparison and correction systems can handle increased work loads anticipated during peak trading periods.

Agency Affected: United States Securities and Exchange Commission

Status: Closed - Implemented

Comments: SEC hired technical expertise within its newly formed automation review group to strengthen the Commission's oversight of market system testing. However, it did not have the market entities in the review conduct complete stress tests of their systems.

Recommendation: The Chairman, SEC, should ensure that all organizations follow structured systems development practices when developing automated systems.

Agency Affected: United States Securities and Exchange Commission

Status: Closed - Implemented

Comments: SEC intends for its newly formed automation review group to ensure market organizations follow structured systems development practices. However, concerns remain regarding exactly how this group will be used. GAO is continuing to monitor SEC progress in this area under another job code (510618).