Co-authored with Steve Krawciw
The new revelations surrounding the Flash Crash of May 6, 2010, once again brought to light an undeniable fact: U.S. regulators desperately need to boost their real-time surveillance capabilities. Nearly five years has elapsed between the time the London-based Navinder Singh Sarao, allegedly influenced the Flash Crash and the government identification of this event! Gone are the days when market issues could be analyzed by a team watching for on-screen images of market events. Regulatory agencies are ill-equipped to handle real-time issues in a timely manner. However, market solutions, such as AbleMarkets.com suite of real-time products are designed to spot market microstructure issues, such as runaway algorithms, predisposition to flash crashes, and presence of aggressive high-frequency traders (HFTs) in real time. These tools have been built and extensively tested over the past decade, and have been available to the government for the asking.
To date, however, major regulatory agencies are slow at adopting the available tools built by the private sector, choosing instead to rely on their own, often deficient and funding-restricted capabilities. As a result, the public markets are placed into a real-time danger zone. One tool the SEC has acquired, Midas from Tradeworx, stores publically-available data and draws charts from the said data. It performs no forensic analysis on the markets, and is limited in the real- time services that are critical to surveillance.
The real-time surveillance tools from AbleMarkets, on the other hand, have been designed and refined over the past eight years with end consumers in mind. Originally developed and deployed as cutting-edge tools to address private sector concerns about the health of financial markets, the tools have been refined over successive generations of software and hardware, taking into account customer feedback and experience. AbleMarkets tools successfully track the participation of aggressive HFT, institutional investors, detect runaway algos and other systemic malfunctions, such as the one that caused Knight Capital to lose $440 million in just 45 minutes, detect flash-crash prone markets and many other aspects of today's market microstructure.
Still, the hope exists that regulatory agencies understand the importance of systemic shifts recently brought onto the markets and does the right thing. The time has come to deploy these very tools presently used by billion-dollar hedge funds to protect all investors, large and small, by deploying them in the federal regulators' domain. Why should American investors wait another five years to identify and remove illegal activity off its markets when solutions for doing so are available in real-time for immediate deployment?
Steve Krawciw [kro:sew] is CEO of AbleMarkets.com. Irene Aldridge is Managing Director of Able Alpha Trading, LTD., and AbleMarkets.com and author of High-Frequency Trading: A Practical Guide to Algorithmic Strategies and Trading Systems (2nd edition, Wiley, 2013).