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Man vs. Machines: Time for a ‘Systems Risk Officer’

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Man versus Machines? It's time for a Systems Risk Officer.

There is a simple way to advance the ball on what we should do about the “technology issue” that has engulfed Knight Capital Group and caused us all to debate “Man vs. Machines” this week.

It's time for all large trading firms to bring in a Systems Risk Officer. Formally.

Think about this: Most large firms — financial and otherwise — have a Chief Risk Officer that monitors credit risk, market risk, reputational risk.

It's time to add another risk. These trading systems are so complex that it's time for a Systems Risk Officer, which — for larger companies — will report to the Chief Risk Officer, or Compliance Officer.

What would such a Systems Risk Officer do? He or she would be responsible for creating a system that monitors the flow of orders ... and shuts them down when something crazy happens.

It would include responsibility for more robust testing of systems. Let's face it: If the only time you test your emergency system is when you need it to work, it will likely fail.

But we also need to recognize the limits of testing, and, indeed, the limits of our ability to predict the future. I spoke this morning with Tyler Moeller, CEO of Broadway Technology, who has built and tested high-speed systems.

He agreed on the need for more testing and robust systems, but noted that testing is hard, it is very difficult to predict what the market — and your program — will do in real time. You can test a system, but in reality most systems are developed in fairly short periods of time and even if they were developed over longer periods of time there is still a substantial risk. You can create a world that simulates the New York Stock Exchange, but it's likely you cannot perfectly simulate that world.

Regardless, Systems Risk Officer is an idea worth considering. And so are "Systems Risk Standards." What's that? Just what is says. For example, it would say that, if I see a thousand orders go out of my system in a second, and that is 10 times the normal flow, the system will shut down automatically.

Should there be "Uniform System Risk Standards" that would apply for all trading firms, that would be separate from circuit breakers that are in place at the stock exchanges? You can certainly argue that, though you will get pushback from people who argue they need more flexibility.

Elsewhere:

1) Employers added 163,000 jobs in July, well above expectations of roughly 100,000 and providing a sign of optimism after three months of sluggish hiring. The number of jobs added in June was revised lower to 64,000 from 80,000. What our economy really needs is a report coming in showing 200,000 jobs created each month.

2) Beazer Homes noted new orders were up 28 percent, continuing the strong order growth for publicly traded home builders. CEO Allan Merrill: "We generated improvement in new home orders, home closings, and backlog, recording our fourth consecutive quarter of year-over-year increases in these metrics."

3) The drought is a big boost for fertilizer companies. This from Agrium's CEO Mike Wilson: "We expect high crop prices and tight grain inventories to create significant support for international nutrient demand in the coming year, as growers globally are expected to expand acreage and optimize application rates."

4) Global markets are mixed this week:

Italy +2.0%
Hong Kong +2.0%
Germany +1.2%
China +0.2%
Spain -0.1%
S&P 500 -1.5%
Brazil -1.8%

—By CNBC’s Bob Pisani

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  • A CNBC reporter since 1990, Bob Pisani covers Wall Street from the floor of the New York Stock Exchange.

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