There has been lots of talk since May 6th on how to prevent the next “flash crash”.  Most of the talk has been focused around installing “circuit breakers”.  But then last week, Nasdaq tried to one up the competition and announced the Nasdaq Volatility Guard (http://www.nasdaqomx.com/volatilityguard)   This is supposed to be a more aggressive method of trade protection.  There are two problems here:  First, once again, the exchanges are not coordinating their policies.  One of the biggest  problems on May 6th was that some exchanges like the NYSE had different rules than other exchanges.  This is a result of a fragmented market which lacks uniform rules.  It is the source of confusion and also a reason why investors have lost confidence.  The second problem is that circuit breakers (or Volatility Guard or whatever you want to call them) do not address the root cause of the May 6th “flash crash”.  The cause was the breakdown in market structure caused by the unintended consequences of years of new regulation.  We think that one of the main “unintended consequences” was the creation of so many market centers with a “for profit” motive.  Their main goal is to make money for their investors and investor protection is a distant second.  The exchanges and market centers have proven this by adding questionable order types like “flash orders” (which have still not been banned) and also releasing some information on their data feeds which some investors thought was private. 

So, do we feel safer now that “Volatility Guard” is here.  Not really.  It feels like  just another version a confidence game like three card monte.