Flash crash panel calls for market overhaul

By Reuters
Friday, February 18, 2011 12:22 EDT
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WASHINGTON/NEW YORK (Reuters) – U.S. regulators should stem the growing tide of anonymous stock-trading and consider charging high-frequency traders fees for the disproportionate amount of orders they send into the marketplace, said a panel of experts advising how to avoid another “flash crash.”

The report laying out 14 recommendations for the Securities and Exchange Commission and Commodity Futures Trading Commission contains some fresh ideas.

Taken together they would significantly overhaul the high-speed market that has gone almost completely electronic in the last decade.

However, the changes would require the SEC and CFTC to take on a massive amount of rulewriting, at a time when the agencies are straining to carry out the Dodd-Frank financial reform law.

Also, some market participants doubted even dramatic structural changes could stop another flash crash at times of high investor fear.

“The recommendations are a good first step…but from a practical standpoint of avoiding another one in the future, it doesn’t go far enough. I don’t think it’s possible to prevent another one from happening,” said Adam Sarhan, chief executive of Sarhan Capital in New York.

The unprecedented May 6, 2010 market crash sent the Dow Jones industrial average down some 700 points before rebounding, all in a matter of minutes.

It rattled investors, exposed flaws in the structure of markets, and set regulators on a mission to fix the system and restore confidence.

The eight-member panel suggested the SEC consider forcing the banks, hedge funds and others that trade stocks outside of the transparent exchanges to provide a minimum level of price improvement.

It wants regulators to consider a so-called “trade at” order routing regime — something that would hurt the growing ranks of “dark pools” where trading is done anonymously.

While some have argued the crash was a freak event that called for obvious adjustments, such as the circuit breakers, others said it was a wake-up call to finally get a firm handle on what could destabilize capital markets.

“In this new trading environment, market structures and regulation have to be more forward looking, with rules and regulations designed on an ex ante basis rather than an ex post basis,” said the panel, which includes Financial Industry Regulatory Authority head Richard Ketchum and former CFTC Chairman Brooksley Born.

The panel also wants regulators to consider a way to better allocate the “costs imposed by high levels of order cancellations, including perhaps requiring a uniform fee across all exchange markets.”

That suggestion comes after regulators and others began raising questions this summer about the massive amount of message traffic, or “noise” in the markets, and whether it allowed some high-speed, short-term traders to manipulate prices for profit gains.

Other recommendations unveiled on Friday, such as expanding and modifying the “circuit breaker” trading pauses, had been telegraphed by regulators and mostly endorsed by market participants and exchanges such as NYSE Euronext and Nasdaq OMX Group.

“The whiz-bang technology in markets today means that when things go wrong, they go wrong very fast,” CFTC Commissioner Bart Chilton said.

“We need assurances that computer trading programs have been tested with an eye toward the possibility of them roiling markets and that there is accountability if they do.”

(Reporting by Sarah N. Lynch, Jonathan Spicer and Roberta Rampton, with additional reporting by Ryan Vlastelica; Editing by Steve Orlofsky, Dave Zimmerman)

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  • Anonymous

    The stock market is a freaking sham. It produces NOTHING. It doesn’t create a single job of any value. All it does is create FAKE money. They say that these Wall Street types are “worth” so many billion dollars, but none of that money even exists! The whole output of the world is somewhere around $17 trillion a year, these scum bags are “worth” over $650 TRILLION. HOW is that even possible? That much money doesn’t exist anywhere but in their computers. If the game were stopped today, and everyone tried to cash out, there wouldn’t be a dime to split between the lot of them.

    The original intent of the stock market was to raise capital for industrial improvements and advancements. Once that sale is made, it never again benefits the company in any real way. In fact, if enough stock is sold, the power in the company is no longer in the company, which usually means the death of it and the loss of all jobs. GREAT! And the rich get tax breaks because they “lost” something on it. THEY win either way, and we lose every time.

    Gambling for the rich with too much money. It needs to be reigned in BIG TIME. Or, like is GOING to happen, the big money folks will make sure nothing of consequence changes so they can keep on screwing us and profiting either way.

  • Anonymous

    The stock market is a scam …. what is the average length of time a stock was held last year? 22 seconds !!!!!!!!!!

    just milking the cow …….. say MOOOOOO

  • http://pulse.yahoo.com/_V5XKDORJ6HIVIZ6V5OTK76KTEY Immortal

    Con jobs to the left of us, con jobs to the right, con jobs ahead, into the valley of debt rode the 320,000,000. The top 2% of the country owns almost half of all value in the country. The rest of us continually find the ground under our feet shifting and then falling apart–more for gas, everything costing more and more, and yet “there’s no inflation” and the dollar is dissipating faster than a handful of helium in a thunderstorm. And then they tell us unions are to blame for the weak economy, not Goldman Sachs, the Fed, or any of the other “high riders” in the financial world. Any minute now someone is going to say, “Feeding your children is a job-killing activity; stop it now!” What’s the bottom 98% of us to do? Regulate the market? How’s a mosquito going to regulate the Colorado River?

  • http://www.rawstory.com/ hounddogg

    “produces nothing”…it produces tons of trash…physical and virtual….

  • Jaimie11

    Yeah, the big boys manipulate it – put your IRA and 401K in the market and they can steal it anytime just by selling their shares at the high price (they must own more than 90% of the market) and the whole market drops leaving you with less all your earnings and a hole in the original investment. The ultimate insider trading.

    How long does it take once you’ve lost 40% to gain it back. Even if the market goes up 100% you’re still at only 80% of your original.

  • http://pulse.yahoo.com/_JETED5IFXLBHDCPATGS3JUS5HU Dip Stick

    Bunch of takers, the lot of them. Never take no for an answer. First they try to bribe us, then discredit us, finally they kill us. All the while they poison our air, water, earth and souls with vile festering putrescence that is rampant consumerism. They are a cancer upon the decent collective consciousness, and should be cut out and discarded as a tumor should be.

  • http://pulse.yahoo.com/_A7KHDX6CSM5TLM6G77EHCIS5ZA Chuck W

    This may sound a little “tinfoil” but does anyone think that the timing of the flash crash coinciding with the end of the goldman sachs fraud investigation by the sec and congress was a little unusual? A little gun to your head capitalism going on there? Goldman is one of the top HFT traders out there.

  • http://pulse.yahoo.com/_Q7G2NHLD62L3CDU7VHFZ4QPVQM Unknown

    Buy stock at $35.45 trigger stock bump to $35.57 Sell stock to the suckers who buy into the rise. Wash rinse repeat a few hundred thousand times a day and at the end of the year hand out the billion dollar bonuses.
    Even the mobsters in Vegas would find this racket dishonest.