Latin American Capital Markets

INTERNET TECHNOLOGY AND THE DEVELOPMENT OF SECURITIES MARKETS 79rapid growth of online trading can push the boundaries of a broker-dealer's onlinesystem capacity and test system resilience, particularly during rapidly changing marketconditions. In addition, such rapid growth can challenge the integrity of these systemsby providing a gateway for security breaches and other types of fraud.Broker-dealers and other market participants that are coming to rely on theInternet or who encourage their customers to use Internet-based services must beable to handle increased trading volume, including possible sudden spikes in use resultingfrom a large number of clients trying to access these Internet-based systemsat times of market volatility. It is also important for a trading system to remain operationalwhen significant components of the system have failed. System resilience is especiallyimportant for online brokers that have limited backup options (such as tradingvia the telephone) in the event their systems fail during critical times. Robustsecurity is of the utmost importance, particularly where details of client assets or theassets themselves might be vulnerable to unauthorized access.Given that the Internet involves technology that evolves rapidly and constantly,regulators are loathe to impose requirements that mandate specific technology.Such a prescriptive approach could result in online trading systems that are inappropriateor outdated. Instead, regulators usually have provided guidance or policystatements interpreting the application of existing rules in relation to system capacity,resilience, and security. In general, regulators have urged broker-dealers to assess continuallytheir vulnerabilities to various sources of risk by, among other things, establishingcapacity estimates; developing backup technology systems and procedures forhandling system capacity problems; implementing procedures for maintaining data integritywhether stored, in transit, or displayed on clients' screens; and instituting controlsto maintain the integrity of software source code. 14As a general caveat, regulators should take into account that broker-dealershave an interest in properly addressing risks relating to system capacity, resilience, andsecurity. A broker-dealer's business will be significantly undermined if the public perceivesits systems as having capacity, resilience, or security flaws and if brokers thatonly provide an online service are aware that loss of public confidence in their facilitieswould be lethal to their business.14 Hong Kong Securities and Futures Commission (2000);"Communication DI/30396 of 21 April 2000" CommissioneNazionale per le Societa e la Borsa of Italy (English version available at http://www.consob.it/produzione/docum/english/Regulations/fr_30396e.htm);TheNetherlands Authority for the Financial Markets, "Further Regulation on theSupervision of Securities Trade 1999," Nadere Regeling, 1999 (English version available at http://www.autoriteit-fm.nl/Uploads/rulebookpdf), as supplemented in February 2001 by "Policy Document 99-0003" (available at http://www.autoriteit-fm.nl/Uploads/Beleidsnotitie99-0003.pdf); and U.S. Securities and Exchange Commission (2001).Copyright © by the Inter-American Development Bank. All rights reserved.For more information visit our website: www.iadb.org/pub