Who is held responsible when a securities trading law is broken due to a software bug

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Imported from previous forum

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Hi All,

In the context of an Computer Algorithim placing an Order and receiving its Trades using a FIX session where there is no human action involved in order creation, (humans just watch the status / performance of this Order dynamically), if something goes wrong in the algorithim (software bug) which leads to unwanted market activity in violation of some SEC law, who is held responsible? Is it:-

  1. The Systems analyst who wrote the requirements specification.

  2. The Technology architect who designed the application.

  3. The programmer who wrote the code.

  4. The tester who failed to find the bug.

  5. The user who bought this application and connected it to a broker / market.

Common sense says it must be “5. The user”, please share your views.

I once asked this question in a FIX project meeting, a senior manager said “I dont know what SEC does, we all shall definetly loose our jobs. So don’t ask stupid questions to which we may not have answers. All of you make sure you do your respective roles fully and properly”.

Regards,
K. Mahesh

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[ original email was from James Crosson - James@FIXFlyer.com ]
K. Manesh,

In most cases your assumption of #5 - “The who bought the application…” is correct. Any mature organization will have trade-loss provisions in licensing and contract terms, providing indemnity against any system/algorithm that result in losses in the marketplace.

Even in the event a trade-loss provision is not included with a system license, the user wouldn’t have a leg to stand on when pursuing the vendor for losses. The reality is that the provider of the system does not have any exposure to the up-side of trading (ie. will not have the ability to increase revenue if the software is used to create market gains), and thus cannot plausibly be responsible for the down-side of trading.

In the event of application problems resulting in substantial losses, the user of the system could, and likely should, cancel their license/contract for the algorithm and/or system used. Any charges of breach-of-contract, however, would be limited to the costs of the application and can’t be linked to market performance.

Hope this helps,

James Crosson
Vice President, Operations
FIX Flyer, LLC.

Hi All,

In the context of an Computer Algorithim placing an Order and receiving its Trades using a FIX session where there is no human action involved in order creation, (humans just watch the status / performance of this Order dynamically), if something goes wrong in the algorithim (software bug) which leads to unwanted market activity in violation of some SEC law, who is held responsible? Is it:-

  1. The Systems analyst who wrote the requirements specification.

  2. The Technology architect who designed the application.

  3. The programmer who wrote the code.

  4. The tester who failed to find the bug.

  5. The user who bought this application and connected it to a broker / market.

Common sense says it must be “5. The user”, please share your views.

I once asked this question in a FIX project meeting, a senior manager said “I dont know what SEC does, we all shall definetly loose our jobs. So don’t ask stupid questions to which we may not have answers. All of you make sure you do your respective roles fully and properly”.

Regards,
K. Mahesh