Financial Markets: Tighter Computer Security Needed

Published by the Government Accountability Office on 1990-01-05.

Below is a raw (and likely hideous) rendition of the original report. (PDF)

                             -n-   -

    :   :   ;   ‘;   /


                   United States
&O                 General Accounting Office
                   Washington, D.C. 20548

                   Information       Management        and
                   Technology       Division


                   January 5, 1990

                   The Honorable Edward J. Markey
                   Chairman, Subcommittee on Telecommunications
                      and Finance
                   Committee on Energy and Commerce
                   IIouse of Representatives

                   Dear Mr. Chairman:

                   This report responds to your December 14, 1988, request and subse-
                   quent discussions with your office for information on (1) the number of
                   known instances of hacker attempts or virus attacks on certain securi-
                   ties trading networks and their related systems;’ (2) the reasonableness
                   of existing controls used to prevent or detect the misuse of securities
                   trading systems; and (3) the existing regulatory framework under which
                   sccuritics trading systems are accessed, operated, and overseen.

                   As agreed with your office, the systems included in this review are the
                   Common Message Switch system and the Intermarket Trading System,
                   operated by the Securities Industry Automation Corporation (SIAC),” and
                   the h’ational Association of Securities Dealers Automated Quotations
                   (NASDAQ) system, operated by the National Association of Securities
                   Dealers ( NASD). Collectively, these systems provide vital links between
                   the exchanges, NASD and their customers by routing orders to buy or sell
                   stocks and options, reporting executed trades, or providing current
                   stock pricing data to the financial marketplace.

                   The systems described above are critical mechanisms used by the
Results in Brief   exchanges:’ and NASD to disseminate information to support our nation’s

                   ’ A hacker is defined as a person who accessesor attempts to accessa computer without authoriza-
                   tion. For purposes of this report, the term hacker refers to an external threat of ~II unauthorized
                   BCWSSto t,he networks and related systems. A virus is generally described as a computer program
                   that can infect, replicate, and spread among computer systems. A virus can be designed to trigger a
                   wide variety of actions, including the destruction of computer data or the disruption of computer
                   “The Securities Industry Automation Corporation is a subsidiary of the New York Stock Exchange
                   and the American Stock Exchange, and operates automation and communications systems that,
                   among other things, support stock trading, market-data reporting, post-trading, and surveillance
                   “For purposes of this report, the term “exchanges” refers to the New York Stock Exchange and the
                   American Stock Exchange.

                   Page 1                                              GAO/IMTF&90-15      Tighten Computer security

 securities trading; they must be held to the highest standards of intcg-
 rity. Although no known hacker attempts or virus attacks have been
 reported, and sufficient controls have been established so that the risk
of successful external attacks appears relatively low, we found a
number of internal control weaknesses at the exchanges’ and NASD’S
computer centers. These weaknesses pose risks of an insider threatening
the systems by introducing security intrusions-such      as a virus-with-
out being detected, thus potentially threatening our nation’s ability to
conduct securities trading. For example, the internal controls in NASD’S
computer center were insufficient to protect critical software and
neither computer center had internal automated data processing audi-
tors to make sure that appropriate internal controls were in place and

The NASD and SIAC have generally agreed that identified weaknesses pose
risks to their operations, and have already taken, or plan to take, steps
to improve internal controls over these systems.

Given a continual threat of security intrusions, the Securities and
Exchange Commission (sEc)-whose role, among other things, is to pro-
tect market operations from fraud-and the exchanges and NASD need to
be more proactive in ensuring the integrity of these systems. In this
respect, when conducting its oversight activities, the SECdoes not exam-
ine the exchanges’ and NASD’S computer security practices. The SEC
explained that it does not have sufficient technical staff to oversee the
computer security practices of each of the exchanges and NASD. In addi-
tion, the exchanges and NASD do not have security administrators knowl-
edgeable in information security and do not have comprehensive
information security programs. However, the exchanges and NASD recog-
nize the need to enhance their information security practices and are
planning to establish more comprehensive security administration

This report contains recommendations that SEC(1) assure that the weak-
nesses we found are properly corrected, (2) oversee the exchanges’ and
NASD’S plans to expand their information security administration pro-
grams, (3) conduct or oversee assessments of the exchanges’ and NASD’S
computer security practices, and (4) acquire the necessary technical
expertise to carry out these activities.

Page 2                               GAO/IMTEGSO-15 Tighten Computer security

              We conducted a risk assessment of the Common MessageSwitch system,
Scopeand      the Intermarket Trading System, and the NASDAQ system. Our assessment
Methodology   included a review of the reasonableness of controls to protect these sys-
              tems from misuse by authorized users or unauthorized intruders, and
              was conducted at the following organizations that own or operate these
              systems: the New York Stock Exchange, the American Stock Exchange,
              NASD, and SIAC. Our risk assessment was based on federal security stan-
              dards and guidelines, and the results of consultations with selected com-
              puter security experts. Details on our assessment and our objectives,
              scope, and methodology are discussed in appendix I.

              The systems included in this review are critical to the smooth function-
Background    ing of our nation’s securities trading. Specifically, the Common Message
              Switch system provides the New York Stock Exchange and the Ameri-
              can Stock Exchange an electronic link that receives orders for stocks
              and options from over 600 member firms, routes the order information
              to the trading floors, and, in turn, routes back trade execution informa-
              tion to the originating member firms. SIAC estimates that in 1988 about
              80 percent of the exchanges’ stock and options orders representing
              transactions involving more than 20 billion shares were processed over
              the Common Message Switch system.

              The Intermarket Trading System is a nationwide, communications and
              data processing network that links the New York Stock Exchange and
              American Stock Exchange, five regional stock exchanges, and the NASD
              for the purpose of routing stock trading orders or reports between these
              exchanges and NASD. By using this system, members of an exchange can
              participate in other markets and buy or sell stocks at the best available
              quotation. In 1988, trades involving 1.9 billion shares were processed
              over the Intermarket Trading System.

              The NASDAQ system provides brokers and dealers, through about 3000
              terminals, with price quotations and associated reports on securities
              traded through the over-the-counter market. The system’s primary func-
              tion is the collection, validation, and distribution of quotation informa-
              tion. On a daily basis, the system provides responses to inquiries, quote
              updates, and trade and volume reports. In addition, NASD uses the net-
              work to exchange quotations and transaction information with its coun-
              terpart exchanges in London and Singapore. In 1988, the system
              facilitated the trading of about 31 billion shares.

              Page 3                                GAO/IMTEGSO-15 Tighten Computer Security

                           Senior officials of SEC,the exchanges, NASD, and SIAC reported no known
F&Skof External            instances of hacker or virus attacks-attempted    or successful-on the
Skcurity Intrusions        exchanges’ and NASD'S systems included in this review. Also, senior offi-
donsidered to Be Low       cials at the Department of the Treasury’s United States Secret Service
                           and the Department of Justice’s Criminal Division and Federal Bureau
                           of Investigation, had not received any incident reports and had no
                           knowledge of any such intrusions.

                           The officials of the exchanges, NASD, and SIAC have implemented a wide
                           range of security controls that protect their systems from the external
                           threat of a hacker or virus attack and, as a result, the risk of such a
                           threat is relatively low. These views related to the Common Message
                           Switch system and the Intermarket Trading System were also supported
                           by conclusions reached in a November 1988 internal review of the SIAC
                           systems by the New York Stock Exchange.

                           The primary reasons for considering the risk of an external hacker or
                           virus attack to be relatively low are that:

                       . The exchanges’ and NASD'S networks are closed networks in that access
                         to these networks is normally through dedicated communications lines
                         and devices that are not available to the general public.
                       . The systems receive data or effect transactions in a way that does not
                         permit outsiders to input executable computer instructions necessary to
                         execute a virus.
                       . The systems examine the messages received through a series of edit and
                         sequence checks, and, if the messages are not in a prescribed format and
                         expected sequence, they are returned to the sender for correction.
                         To successfully transfer data over these networks requires knowledge
                         and use of specialized network protocols4
                         Transactions involving orders to buy or sell securities that are processed
                         by these systems are reviewed for reasonableness by automated sys-
                         tems, exchange professionals, or NASDAQ participants before they are
                         acted upon, In addition, all executed securities trades receive continuous
                         scrutiny by personnel from member firms, the exchanges, and NASD to
                         ensure that the trades are legitimate.

                           In addition, these systems are not designed with features that have been
                           successfully exploited by individuals interested in propagating a virus.
                           For example, we reported to you in June 1989 on a virus that penetrated

                           IA protocol is a set of rules for sending data between computers or between a computer and a com-
                           munications device.

                           Page 4                                             GAO/IMTEG90-15      Tighten   Computer   Security

                            the national research community’s Internet system.s The Internet system
                            has a number of characteristics different from the exchanges’ and NASD'S
                            systems that makes it more susceptible to a virus attack. For example:
                            (1) it is not a closed network, rather it is a widespread, interactive, mul-
                            tinetwork that loosely connects over 500 networks and half a million
                            government and private sector researchers; (2) the system permitted the
                            sending of executable computer instructions across the network,
                            whereas the exchanges’ and NASD'S networks do not accept executable
                            instructions; (3) the Internet system was exploited through weaknesses
                            in utility programs such as electronic mail programs, and the exchanges’
                            and NASD'S systems do not process utility programs; and (4) the system
                            offered “trusted host” features to specific users and the exchanges’ and
                            NASD'S systems do not. Trusted host features allow individuals or com-
                            puters to more easily access other computers.

                            We also found that in November 1988, the New York Stock Exchange’s
                            electronic data processing internal auditor conducted a preliminary
                            study of the vulnerability of SIAC systems to a computer virus. For some
                            of the reasons discussed above, the study concluded that the external
                            risk of a computer virus being inserted either into the Common Message
                            Switch system or the Intermarket Trading System was remote.

                            The most significant threat to the elichanges’ and NASD'S systems-a
  Computer Security         virus, for example- is from employees who have access to their com-
’ Control Weaknesses        putcr systems. The primary reasons for the insider threat is that these
  Increase the Risk of an   employees generally have both (1) knowledge of how the systems oper-
                            ate and (2) access to the systems. Overall, officials at the exchanges,
  Internal Attack on        NASD, and SIAC agreed with this assessment but believed that the risk of
  Exchange and NASD         such attacks from an internal source was low because of high quality
  Systems                   control procedures and practices in place at their computer centers.
                            IIowever, based on our risk assessment, we identified 10 security weak-
                            nesses at NASD and 3 security weaknesses at SIAC that increase the risk of
                            an insider introducing a virus into the networks or related systems of
                            the exchanges and NASD. NASD and SIAC agreed that these weaknesses
                            posed risks to their systems, and have taken or plan to take action to
                            correct them.

                            “Computer Security: Virus Highlights Need for Improved Internet Management (GAO/IMTEC-89-57,
                            June 12, 1989).

                            Page 5                                          GAO/IMTEGSO-16     Tighten   Computer   Security
-iI               B-237674

$D Security       To protect systems from the internal threat of security intrusions, intcr-
+knesses          nal controls should be in place that, among other things, (1) establish
                  proper separation of duties involving the development, execution, test,-
   I              ing, and review of computer programs; (2) provide stringent access con-
  II              trols over information and equipment used to execute computer
                  programs; and (3) ensure accountability by documenting and retaining
                  an audit trail of computer center activities. The need for such controls
                  has been emphasized in federal security guidelines and consultations
                  with selected computer security experts (see appendix I).

                  At NASD'S computer center we found insufficient internal controls to pro-
                  tect against the introduction of security intrusions, such as a virus, into
                  the NASDAQ system. Ten interrelated security weaknesses were found
                  that included conditions where computer center staff, such as systems
                  programmers, computer operators, or quality assurance staff (1) were
                  able to perform tasks well in excess of their normal responsibility or (2)
                  were performing their responsibilities in an incomplete or inadequate

                  Specifically, seven security weaknesses were identified in the NASDAQ
                  system’s minicomputer processing environment. These computers sup-
                  port several important functions including the automatic execution of
                  small stock orders (orders of 1000 shares or fewer) and the reconcilia-
                  tion of stock trades. The following examples illustrate the nature of
                  these weaknesses:

              l An improper separation of duties existed between computer center func-
                tions For example, NASD relied on systems programmers to perform cer-
                tain duties normally reserved for quality assurance and applications
                programming staff. In addition, computer operators could perform cer-
                tain duties normally reserved for security administrators. As a result,
                systems @-ogrammers and computer operators could more easily intro-
                duce a computer virus into production minicomputers with little chance
                of being detected.
              9 Information and equipment were not sufficiently protected to prevent
                computer center staff from executing unauthorized computer programs.
                For example, all computer operations staff had unrestricted access to
                production minicomputers, enabling them far greater opportunity to
                access data and equipment to execute a computer virus. In addition, the
                production minicomputers were equipped with compilers, which allowed

                  Page 6                                GAO/IMTEC90-15   Tighten   Computer   Security
-                    ---

    . .   -. .._ _-.- ._--
                                 the opportunity for unauthorized computer programs to be more easily
                                 introduced into the system.”
                             l   Documentation of the operators’ activities had a short retention period.
                                 This increased the possibility of destroying audit trails, which could
                                 result in a lack of accountability or legal evidence, for example, in
                                 instances where a virus had a delayed release.

                                 In addition to the seven minicomputer weaknesses, three other broader
                                 weaknesses were found. Within NASD’S quality assurance function, soft-
                                 ware testing was either inadequate or incomplete in certain important
                                 respects. Specifically, NASD did not completely test new or modified com-
                                 puter programs to ensure that they did not introduce a virus. In addi-
                                 tion, KASD did not ensure that only the tested software was entered on
                                 the production computers, We also found that NASD’S physical security
                                 practices did not completely control employees’ access to the computer
                                 center or their movements once inside the center. Also, NASD did not
                                 have automated data processing auditors at its computer center to
                                 ensure that proper internal controls were in place and operating as
                                 intended, Weaknesses within NASD’S quality assurance, physical secur-
                                 ity, and internal auditing limit the effectiveness of its internal controls
                                 and increase the risk that its computer operations could be exploited by
                                 computer center staff.

                                 Details of each of these internal control weaknesses have been discussed
                                 with NASD officials. They agreed that identified weaknesses pose risks to
                                 their operations and have moved swiftly to improve the controls over
                                 their system. Specifically, NASD officials responsible for NASD’S computer
                                 center said that immediate actions have been taken or are planned to
                                 correct all the above weaknesses.

SIAC Security Weaknesses         At SAC, we found three security weaknesses in the areas of software
                                 testing, contingency planning, and internal auditing. Specifically, we
                                 found that:

                             . The software change control staff conducted tests to ensure that new or
                               modified software performed as intended, but did not conduct necessary
                               tests designed to ensure that no new vulnerabilities, which would allow
                               the insertion of a computer virus, are introduced at the time the soft-
                               ware is developed.

                                 “A compiler is an essential tool for writing an application program. It translates high-order language
                                 code into machine language that can be executed by a computer.

                                 Page 7                                               GAO/IMTEX-SO-15      Tighten   Computer   Security
  1   -....   .--.   “...“_”   _-__-___


                                          l   MAC  had prepared a contingency plan that addressed actions to be taken .
                                              if services were disrupted within the SIAC computer center. However,
                                              this plan did not include needed backup and recovery procedures in the
                                              event of a,security intrusion such as a computer virus. As a result, SIAC
                                              could not ensure that exchange networks and related systems were pre-
                                              pared to recover efficiently from a computer virus attack. The risk of a
                                              service disruption at SIAC is of particular concern because an offsite
                                              backup facility that could be used to resume computer services in the
                                              event of a disruption is not scheduled to be operational until 1991.
                                          l   SIAC did not have any automated data processing auditors within its
                                              internal audit function. As a result, it was not well equipped to conduct
                                              necessary internal control assessments of SIAC'S data security

                                              SIAC generally agreed that identified weaknesses posed increased risks to
                                              its operations and has taken or plans to take corrective actions in each
                                              area. Specifically, SIAC agreed to strengthen its software testing process.
                                              In addition, it has recently hired a computer auditor and is modifying its
                                              contingency plan to include necessary backup and recovery procedures.

                                              Active SECoversight and computer center security administration activi-
SEC’sOversight and                            ties are critical to ensuring that effective security controls are estab-
Computer Center                               lished and in place at the exchanges’ and NASD'S computer centers.
Information Security                          Results of our review indicated a lack of SEC oversight in this area. In
                                              addition, we found that the exchanges’ and NASD'S centers had insuffi-
Administration Are                            cient plans, policies, and procedures to define and evaluate information
Incomplete                                    security controls over the exchanges’ and NASD'S networks and related

                                              The Securities Exchange Act of 1934 (15 IJ.S.C. 78a-78(jj)) provides SEC
                                              with broad authority and responsibility to oversee the operations at the
                                              exchanges and NASD. SECmay issue rules and regulations and prescribe
                                              standards and procedures to protect investors, maintain fair and orderly
                                              markets, or safeguard securities and funds. The act also provides the
                                              exchanges and NASD, as self-regulatory organizations, with broad
                                              authority and responsibility that includes (1) ensuring that the trading
                                              of securities is properly conducted, (2) issuing rules that, in general, pro-
                                              tect investors and the public interest, and (3) assuring the prompt, accu-
                                              rate, and reliable performance of their functions. In this regard, the
                                              exchanges, NASD, and SIAC are responsible for controlling the access to
                                              and operations of their networks and related systems.

                                              Page 8                                 GAO/IMTEC-90-16   Tighten   Computer   Security
I   8237874

    To help protect access to and operations of federal systems, federal
    agencies are required to (1) conduct risk analyses of their computer
    operations;7 (2) establish information security policies and procedures to
    provide reasonable network and related system protection; (3) establish
    a security awareness training program to make employees aware of
    their specific security responsibilities and how to fulfill them; and (4)
    conduct security certifications and audits to ensure compliance with
    information policies and procedures, and to ensure that security controls
    are in plice and effectively working. Federal policy further requires
    that federal agencies prepare security plans for their sensitive systems.”
    Although the exchanges and NASD are not required to follow these poli-
    cies, they provide a framework to assess the reasonableness of existing
    controls used to prevent or detect the misuse of the exchanges’ and
    KASD’S systems. In addition, several of the computer experts interviewed
    recommended similar steps to ensure the effective administration of
    information security by the exchanges and NASD.

    IIowever, we found that SEC and the computer center managers had not
    established effective information security practices. Specifically, SEC
    oversees financial market operations through rule reviews, inspections,
    and surveillance activities. Among other things, SEC oversight is
    intended to protect against trade manipulations or fraud. It does not
    specifically examine the exchanges’ and NASD’S computer centers or their
    networks during these oversight activities to ensure that these centers
    and networks are protected from security intrusions. In discussing the
    need for such assessments, SEC explained that it does not have sufficient
    technical expertise to conduct such reviews and relies on the exchanges
    and NASD to ensure information security over their own systems.

    Our review of the exchanges’ and NASD’S computer centers indicated that
    security administrators were primarily responsible for ensuring reason-
    able physical security practices, and they were not knowledgeable in
    information security. NASD and SIAC acknowledged that they had not
    established a formal information security program. For example, they

    ‘According to Office of Management and Budget Circular A-130 Management of Federal Infornration
    l&ources, dated December 12, 1985, the objective of a risk analysis is to provide a measure of the
    mlnerabilities           of and threats to an installation, such as a computer center and its related
    networks and systems, so that security resources can be cost effectively deployed to minimize poten-
    tial loss. Risk analyses should be conducted prior to approval of a system’s design specifications,
    whenever a significant installation change occurs, and at periodic intervals established by the

    ‘Office of Management and Budget Bulletin Number 88-16, Guidance for Preparation and Submission
    of Security Plans for Federal Computer Systems Containing Sensitive Information, dated July 6, 1988.

    Page 9                                              GAO/IMTEGBO-15       Tighten   Computer   Security

                  had not: (1) conducted formal risk analyses of the information security
                  threats to and vulnerabilities of their networks and systems; (2) pre-
                  pared written information security plans, policies, and procedures; (3)
                  conducted information security awareness training; or (4) conducted
                  network and related system security certifications and audits.”

                  NASD and SIAC had not established more formalized information security
                  programs because they believed that the integrity of information
                  processed by their systems was protected through a number of controls
                  including strict data formats and protocols, and close scrutiny of the
                  trading, reporting, and clearing of systems’ transactions. Nevertheless,
                  NASD and SIAC officials agreed with the need to establish more formal
                  information security programs, and have begun actions to establish com-
                  prehensive information security programs for their computer center
                  operations. NASD and SIAC have or plan to appoint information security
                  administrators, conduct risk analyses, establish formal information
                  security policies and procedures, conduct information security aware-
                  ness training, and conduct related system security audits.

                  The risk of outside intrusions to these systems that support our nation’s
Conclusions and   financial marketplaces is relatively low. The risk of a security intrusion
Recommendations   by an insider is higher than necessary in these systems that are so vital
                  to our financial well-being. SEC'S limited oversight of these systems cou-
                  pled with the lack of comprehensive security administration at the com-
                  puter centers of the exchanges and NASD have contributed to the
                  vulnerabilities we found. The threat of computer viruses has magnified
                  the need for high standards of integrity for these systems. Such a secur-
                  ity intrusion introduced into these systems could literally bring securi-
                  ties trading to a halt.

                  Accordingly, we recommend that the Chairman of the Securities and
                  Exchange Commission:

                  Immediately follow up on the security weaknesses identified in this
                  report to ensure that they have been corrected.
                  Oversee the exchanges’ and NASD'S plans as they expand the role of their
                  computer security administration functions. Specifically, SEC should
                  require that they: (1) conduct periodic risk analyses; (2) develop written

                  {‘During calendar year 1989, both the New York Stock Exchange and the NASD contracted with exter-
                  nal audit organizations to conduct system reviews that included security assessmentsof the
                  exchanges’ and NASDAQ systems. These results were not available at the time of our review.

                  Page 10                                          GAO/IMTEGSO-15      Tighten   Computer   Security

                  information security plans, policies and procedures; (3) conduct infor-
                  mation security awareness training; and (4) obtain independent assess-
                  ments of the reasonableness of network security controls.
                l Periodically conduct or oversee independent assessments of the
                  exchanges’ and NASD'S information security programs to ensure that
                  they provide reasonable assurance that the networks and systems are
                  adequately secured.
                . Acquire the necessary technical expertise to conduct these activities.

                    We discussed the contents of this report with senior officials of the SEC,
                    the New York Stock Exchange, the American Stock Exchange, NASD, and
                    SIAC, who generally agreed with our findings and recommendations. We
                    have incorporated their comments as appropriate. In this regard, on
                    November 16, 1989, the SEC published an automation review policy
                    statement that, among other things, requests that the exchanges and
                    KASD periodically assess the vulnerability of their automated systems to
                    external and internal threats. This policy statement was not available
                    for our review at the time we concluded our study.

                    As arranged with your office, unless you publicly announce the contents
                    of this report earlier, we plan no further distribution until January 3 1,

                    This work was performed under the direction of Howard G. Rhile, Direc-
                    tor, General Government Information Systems, who can be reached at
                    (202) 275-3455. Other major contributors are listed in appendix II.

                    Sincerely yours,

                    Ralph V. Carlone
                    Assistant Comptroller General

                    Page 11                               GAO/IMTEC-SO-16   Tighten   Computer   Security

Lelker                                                                                                         1

Appendix I                                                                                                 14
Adpendix II                                                                                                17
Major Contributors to


                        GAO       General Accounting Office
                        IMTEC     Information Management and Technology Division
                        NASI)     National Association of Securities Dealers
                        NASDAQ    National Association of Securities Dealers Automated
                                      Quotations System
                        SEC       Securities and Exchange Commission
                        SAC       Securities Industry Automation Corporation

                        Page 12                              GAO/IMTEC-SO-16   Tighten   Computer   Security

     Page 13   GAO/IMTEGSO-16   Tighten   Computer   Security
Al)p+~~,_x I

Objectives,Scope,and Methodology

                     Our objectives were to obtain information on (1) the number of known
                     instances of hacker attempts or virus attacks on selected exchange and
                     NASD networks and their related systems; (2) the reasonableness of
                     existing controls used to prevent or detect the misuse of exchange and
                     NASD systems; and (3) the existing regulatory framework through which
                     exchange and NASD systems are accessed, operated, and overseen. The
                     systems included in this review are the Common Message Switch system
                     and the Intermarket Trading System, operated by SAC, and the NASDAQ
                     system, operated by NASD.

                     To determine the number of known instances of hacker attempts or
                     virus attacks on the Common Message Switch system, Intermarket Trad-
                     ing System, and NASDAQsystem, we obtained information from senior
                     officials at the New York Stock Exchange, American Stock Exchange,
                     NASD, and SAC on the extent of such security intrusions on the
                     exchanges’ and NASD'S systems. We also obtained supporting information
                     from the SEC and senior officials at the Department of Justice’s Criminal
                     Division and the Federal Bureau of Investigation, and the Department of
                     the Treasury’s United States Secret Service.

                     To assess the reasonableness of existing controls for preventing or
                     detecting system misuse by authorized users or unauthorized intruders,
                     we conducted a risk assessment to evaluate the controls used by the
                     exchanges, NASD, and SIAC to protect their systems. At present, regula-
                     tions of the exchanges, NASD and SEC do not provide specific computer
                     security standards for securities trading systems, nor do they describe
                     what constitutes an effective information security program. While the
                     exchanges, NASD, and SIAC are not required to implement federal stan-
                     dards, these standards do provide a framework to assess the reasonable-
                     ness of existing controls used to prevent or detect the misuse of the
                     exchanges’ and NASD'S systems. Accordingly, we developed our risk
                     assessment guide from a review of existing federal standards and guide-
                     lines on network and computer security. In addition, we held discussions
                     with selected computer security experts on the need for selected secur-
                     ity controls on the exchanges and NASD systems. Specifically, the experts
                     we consulted were:

Federal Government   Lieutenant Colonel George Mundy, Chief Scientist, Defense Data Net-
                     work, Defense Communications Agency

                     Ms. ,Judith A. Parks, Assistant Commissioner, Information Resources
                     Systems, General Services Administration

                     Page 14                              GAO/IMTEC-O-15   Tighten   Computer   Security
                                    Appendlx I
                                    Objectives, Scope, and Methodology

                                   Mr. .John Perry, Special Agent-in-Charge, Fraud Division, United States
                                   Secret Service

                                   Dr. William Scherlis, Program Manager for Software Technology,
                                   Defense Advanced Research Projects Agency

                                   Mr. Dennis D. Steinauer, Manager of the Computer Security Management
                                   and Evaluation Group, Computer Security Division, National Institute of
                                   Standards and Technology

Private Sector                     Mr. Robert I’. Campbell, President, Advanced Information Management,

                                   Mr. Albert Decker, Partner-in-Charge, Information Technology Security
                                   Services, Coopers & Lybrand

                                   Mr. C. IIowie Hodges, II, Division Manager, Risk Management Center/
                                   Security and Risk Management Division, American Bankers Association

                                   Dr. Clifford Stoll, Astrophysicist,             Harvard-Smithsonian            Center for

                                   In addition, we evaluated a confidential study conducted by the New
                                   York Stock Exchange entitled “Understanding the Threat of Computer
                                   Viruses in the New York Stock Exchange Computer Systems,” (Nov.

                                   The primary federal standards and guidelines that we used to assess the
                                   reasonableness of the controls established by the exchanges, SIAC, and
                                   NASI)are the Office of Management and Budget Circular A-130, Manage-
                                   ment, of Federal Information Resources, (Dec. 12, 1985>, and related
                                   Federal Information Processing Standards Publications published by the
                                   Department of Commerce’s National Institute of Standards and Technol-
                                   ogy. We also used guidelines contained in the Electronic Data Processing
                                   (EDI’) Examination Handbook, issued by the Federal Financial Institu-
                                   tions Examination Council.’

                                   “l’hc~Federal Financial Institutions Examination Council was established in 1978 to develop uniform
                                   cLxamination and supervision practices for all depository institutions’ regulatory agencies. Members of
                                   the Council include the Federal Reserve System, Office of the Comptroller of the Currency, Federal
                                   Deposit Insurance Corporation, Federal Home Loan Bank Board, and the National Credit linion

                                   Page 15                                             GAO/IMTECSO-15       Tighten   Computer   Security
                                 Appendix I
                                 Objectives, Scope, and Methodology

_.   : _...--...-..--.---.--.-
                                 In designing our risk assessment guide, we considered two types of
                                 threats involving hacker attempts or virus attacks. The first of these
                                 threats is the external threat that comes from unauthorized persons
                                 outside the organization.’ The second type of threat is the internal
                                 threat that comes from employees inside an organization. An organiza-
                                 tion’s information security program should also address emergencies
                                 such as fires, floods, electrical disruptions, etc., to the extent that such
                                 emergencies increase the external or internal threat. For each of the
                                 internal and external threats, we assessed the extent to which security
                                 controls were in place to protect the networks and related systems from
                                 hacker attempts or computer virus attacks by unauthorized persons or
                                 by authorized employees of the exchanges and NASD.

                                 To examine the reasonableness of the exchanges’ and NASD'S security
                                 against these threats, we conducted our risk assessment at their com-
                                 puter centers and evaluated the following seven management informa-
                                 tion functions: communications management, computer programming,
                                 computer operations, quality assurance, physical security, security
                                 administration, and internal reviews.

                                 To obtain information on the existing regulatory framework and to iden-
                                 tity policies and procedures specific to exchange network security, we
                                 obtained appropriate regulations and interviewed officials from SEC,the
                                 New York Stock Exchange, the American Stock Exchange, NASD, and
                                 WAC. In this regard, we reviewed available implementing procedures
                                 detailing oversight, operations, and access responsibilities.

                                 We conducted our review in accordance with generally accepted govern-
                                 ment auditing standards between February and October 1989.

                                 “Our assessment of the external threat to the exchanges’ and NASD’s networks did not include the
                                 (axchanges and NASD’s member brokerage firms which, as authorized users, arc responsible for the
                                 IISCand protection of their computer terminals and lines connected to the networks.

                                 Page 16                                           GAO/IMTEC-90-E      Tighten   Computer   Security

. A/ppendix II

 $!IqjorContributors to This Report

                         Richard J. Hillman, Assistant Director
 Iktformation            William D. Hadesty, Technical Specialist
                         Robert C. Sorgen, Evaluator-in-Charge
                         Tamara J. Ealey, Computer Scientist
   ethnology Division,


 (510397)                Page 17                              GAO/IMTEG90-16   Tighten   Computer   Security
         ---   ---.--___---   ---_--.---lll---
-j   -