“Shortly after the opening, a trader submitted a basket to the NYSE floor to buy $10.8 billion worth of stock all at once when he intended to buy only $10.8 million. $10.8 billion was just about one-third of what NYSE usually traded during a full day at the time, a huge amount relative to the market, the mother of all aggressively priced and oversized orders.”

You know what would happen next in today’s markets, don’t you? After all, you have witnessed the May 6^th Flash Crash, the daily mini-flash crashes, as well as the August 2012 Knight-mare, which crushed a storied market-maker and forced it to merge with high frequency trading firm Getco. [Incidentally two of the most profitable days for high frequency trading firms in history, save for the gravy-day 2008-2009 financial crisis, have been the May 6^th 2010 Flash Crash and the August 1^st 2012 Knight fiasco.]

Well, such a program did in fact hit modern markets on September 1^st 2004. Hardly anyone even noticed. The incident is recalled in R.T. Leuchtkafer’s (RTL) latest SEC comment letter for the SEC’s proposed Regulation System Integrity and Compliance (Reg SCI).

“Though the trading crowd was confused, as they worked the orders intermediaries called for more liquidity and tried to confirm the basket wasn’t an error, the basket was cancelled soon after. Books didn’t instantly empty, prices didn’t ricochet to $100,000 a share in a microsecond, market makers didn’t play “hot potato,” and major indexes weren’t suddenly shocked. The incident barely made the news.”

R.T. Leuchtkafer (RTL) is no stranger to thoughtful and well-expressed viewpoints regarding our US Equity Market Structure. He has written several comment letters to the SEC that are in the public record, and a few of them are included here for your reference:

US Equity Market Structure Concept Release Comment Letter (April 2010)

Preliminary SEC Flash Crash Findings Comment Letter (May 2010)

SEC/CFTC Flash Crash Findings Comment Letter (October 2010)

Joint CFTC-SEC Comment Letter on Scalping (February 2011)

RTL has also assembled a thorough bibliography of press editorials, academic papers, and government thought pieces on high frequency trading and market making, which you can browse through here: HFT Bibliography of Studies.

RTL’s Reg SCI comment letter can be read here: Reg SCI Comment Letter (July 2013).

He makes the case that REG SCI should be expanded beyond Exchanges and ATSs, and should actually cover high frequency traders themselves. He points out that investors and the National Market System have more at stake if Getco/Knight or Virtu has a serious technology problem, than if BYX or NSX (two low-volume exchanges) has one. However as it currently stands, BYX and NSX will be subject to Reg SCI, and Getco/Knight or Virtu will not.

“It would be peculiar if Reg SCI at adoption didn’t apply to at least some segments of the high frequency trading industry: more peculiar still because by at least one measure Knight’s problems had a worse effect on confidence and investment than the May 6,2010 Flash Crash.”

RTL has some other observations we will tease you with:

“Speed put high frequency firms at the top of price queues when they wanted to be there, and let them cancel out when they didn’t. Speed let firms collect rebates, collect spreads, interposition between investors, and press hard or flee when markets turned.”

“To a point, speed creates certainty. Speed can also amplify complexity and fragility. Examples much in the news are large and small flash crashes.”

“Order books are thin in lit markets in part because market makers can quote 100 shares far from the touch and still get juicy regulatory privileges. They’re also thin because 40 percent of trading is off-exchange.”

“One thought through all this is that while market practitioners may know some aspects of their businesses quite well, they can overestimate their industry’s skills while they underestimate or misunderstand their industry’s risks.”

“We will lower the risk of more episodes like it only when the government asserts reasonable oversight of at least the most active firms trading in the markets. To restore confidence the public must see the government take that meaningful step. We can’t simply trust builders and architects. We have to regulate them.”

We find it puzzling that collectively, our industry’s thought leaders and regulators refuse to acknowledge the damage and danger that a high speed marketplace – anonymous, with conflicted interests, and foxes guarding the hen-houses – has imposed upon investors. Why do they all persist in ignoring the positive attributes of prior market structures, and focus instead on amplifying the negative ones?

Please read RTL’s Reg SCI Comment letter, and read it a second time. It demonstrates remarkable perspective.