SEC Proposal to Curb High-Frequency Trading Falls Far Short Of Goal: Industry Experts

Critics Assail SEC's Latest Attempt To Protect Us From Trading Mayhem

More than two years since the "flash crash" sent investors fleeing the stock market and nearly a year since the Facebook IPO imploded, the Securities and Exchange Commission is floating new rules designed to protect investors from more wild swings or botched public offerings.

Late last week, acting SEC chairman Elisse Walter proposed new regulations, which she said would “prove instrumental in our efforts to bolster investor confidence, protect investors, and maintain fair and orderly markets.”

Market experts reached by The Huffington Post, however, said the rules' narrow focus would do little to prevent the kind of market meltdown seen in the flash crash or other trading debacles of the past few years.

“We need to address the stock market issues from the last crash, but we need quality management systems to help people prepare and recover for the next incident,” said Jim Northey, co-founder of Hancock, Mich., market technology firm LaSalle Technology Group. “This is not a quality management system.”

The Securities and Exchange Commission declined to comment on criticism of the proposal. The rules the SEC is pushing for consideration were announced Thursday but have not yet been published in the official journal of the U.S. government, an action considered the initial step in the federal rule-making process.

Under the new rules, the SEC would ask stock exchanges to create procedures that can quickly spot market disruptions related to high-speed trading. Such fast-paced "robot" trading now makes up more than half of all stock market transactions in the United States and has been widely blamed for the May 2010 “Flash Crash,” when the Dow Jones Industrial Average dropped by nearly 9 percent in a matter of minutes before recovering.

That crash was just the first of a series of market disruptions caused by electronic trading over the past few years. Technical glitches also disrupted the Facebook IPO last year, and were blamed for the collapse of brokerage firm Knight Capital.

Northey has been working with other people in the financial industry to create a set of voluntary standards tentatively named “AT 9000,” which sets guidelines on how to develop and maintain computer systems that perform automated trading. His firm provides consulting services to traders on how to implement technology standards.

Northey and other experts said that the problems caused by such trading have very complex root causes, and will not be solved merely by ensuring the software executing the trade is working as expected.

“The day of the Flash Crash, every system behaved the way it’s supposed to and there was not a market defect. The algorithms behaved as they were supposed to. It was the interaction between them that caused the crash," Northey said.

Andrei Kirilinenko, a professor at MIT who was recently the chief economist at another federal market regulator, the Commodities Futures and Trading Commission, has so far been deeply involved in shaping the government's understanding of how to make markets more resilient in the age of electronic trading. Kirilinenko said he would reserve judgement on how tough the proposed investor protections are until they are officially published.

But he says the proposal “sounds like it's basically going to take some existing practices and make them federal regulations.”

“While that’s a good thing, regulators really need to start thinking about a more principled approach to regulation of automated markets instead of always reacting to the latest crisis,” Kirilenko said.

Still, some watchers said, it's a start.

“The technology that supports all of this is very complex,” said Bob Binder, who has also been working on the AT 9000 initiative “The fact that they haven’t hit on all those things is not really so surprising.”

Before You Go

Popular in the Community

Close

What's Hot