Happy Anniversary Flash Crash

There has been much hype this week about today’s Flash Crash Anniversary.  We have certainly contributed with some comments about what we think has not changed and how we think another flash crash could happen again.  But up until now, the pro-HFT, status quo crowd has been pretty quiet.  Guess they think if they don’t call attention to it, then maybe the critics will just go away.  Well, apparently, they couldn’t hold out any longer and we have been treated with some quotes from the “don’t change anything or I’ll take my liquidity and go home crowd”.  We will first post the pro-HFT comment and then offer the Themis translation.  First we have the COO from the CME Group making some comments Read Article Here :

 Comment: “Very careful consideration should be given to any decision to place restrictions on these traders that would be harmful to their participation and result in less efficient and less liquid markets.”

Translation: Don’t even think about new regulations or HFT will take their liquidity  away.  That is a threat.

 Comment: “There is considerable evidence that high-frequency traders increase liquidity, narrow spreads and enhance the efficiency of markets”

Translation: Pulled this one from the HFT handbook that was written two years ago.  And that Brogaard guy proved this already with his study of 100 stocks.

 Comment: “I want to make sure we all are mindful not to chase liquidity away.”

Translation: Uh, I am the COO of an exchange that makes money based on volume.  If the regulators crack down on HFT, that means less volume for me and a smaller bonus.

 Next we are treated with some words of wisdom from the global head of electronic equity trading at Deutsche Bank Watch Interview Here:

 Comment: “The reason why we have not seen a repeat of the flash crash is the prompt and definitive action taken by the SEC to address the fundamental market structure issues that were uncovered by the May 6th events.”

Translation: Good thing the SEC is overwhelmed by Dodd Frank and all they have really done is put on some band aids.

 Comment: “The SEC came in quickly with the circuit breakers proposal and was implemented in record time”

Translation:  The public thinks they are protected know from flash crashes but the current circuit breakers only cover the Russell 1000 stocks and some ETF’s

Comment: “Pre trade risk controls will prevent outsized or silly orders from coming into the market”

Translation: The SEC just got rid of our smaller HFT competitors for us and that means more money for the big banks to split with each other.

Ok, now that we got that over with, let’s get back to the real truth of what has happened since May 6th. Today, there is an outstanding op-ed in the NY Times written by Ted Kaufman, former Senator of Delaware and Carl Levin, Senator from Michigan Read Article here.  Here are a few of their comments:

 “The top cop for our financial markets remains inexcusably blind to the activities of high-speed computer trading.”

 “In response, the S.E.C. should work with the C.F.T.C. to establish the audit trail, which would allow real-time monitoring of electronic trading; stop trading venues from catering unfairly to high-speed traders at the expense of regular investors; make high-frequency traders bear their fair share of the costs involved in heavy, instantaneous flow of electronic messages, which would discourage strategies to stuff the system with orders that are immediately canceled; and rethink rules that give too much priority to the rapid-fire orders that high-frequency traders rely upon.”

 “Americas capital markets, once the envy of the world, have been transformed in the name of competition that was said to benefit investors. Instead, this has produced an almost lawless high-speed maze where prices can spiral out of control, spooking average investors and start-up entrepreneurs alike. “

 “The flash crash should have sounded an alarm. Unfortunately, the regulators are still asleep.”

Lucky for us that the Senators are not buying the argument from the pro-HFT, status quo crowd.  Only real reform (not just patchwork fixes) will prevent another flash crash and bring back investor confidence.  The question is: Do our regulators have the stomach to fight some tough battles with the well financed and well entrenched status quo crowd?   It’s going to take pressure from us in the institutional and retail investment community to make sure that they do their job.