Courtesy of Tyler Durden
Computerized trading platforms and various algos are entering the biggest frenzy over assorted technological gimmicks since the October 1987 crash. And the public demands their blood. Or as the case may be, Lithium Hydride. Alas, the agency that is supposed to protect investors from abuses of HFT and various other newfangled technologies is woefully stupid to be able to deal with this great issue. Nonetheless, Senators Ted Kaufman (D-DE) and Mark Warner (D-VA) on Friday proposed an addition to the Senate’s Wall Street reform bill that would direct the Securities and Exchange Commission and the Commodity Futures Trading Commission to report to Congress on several key issues surrounding the May 6, 2010 market meltdown, which sent the Dow Jones Industrial Average tumbling dramatically in minutes. High-frequency-trading algorithms have been the initial focus of questions concerning the collapse. We hope Kaufman is successful. On the other hand, the most likely product of the SEC’s work product will be a 1 million page printout of all the jpegs in www.underagetransvestitesforregulators.com, better known in SEC circles as due diligence output. As usual, we hope we are wrong. As usual, we suspect we aren’t.
“A temporary $1 trillion drop in market value is an unacceptable consequence of a software glitch,” said Kaufman and Warner in a joint letter to Senate Banking Committee Chairman Chris Dodd (D-CT), requesting that their directive to the SEC and CFTC be inserted into the Manager’s Amendment of the Wall Street reform bill. “We are concerned that as markets rely on and entrust such a high percentage of the capital management of the market to black-box trading systems that systemic problems may be created,” added the two Senators.
The Kaufman-Warner addition would direct the SEC and CFTC to report to Congress within 60 days of the enactment of the Wall Street reform bill the following:
- The causes of the May 6 market dive;
- How the SEC can evaluate whether the proprietary trading activities of major banks employ algorithmic trading practices that represent potential systemic risks to the markets;
- The potential need for industry-wide pre-trade operational risk controls that would minimize the incidence and magnitude of any trading errors;
- How the agencies can gain analytical assistance from academics and private analytic firms under controlled conditions to conduct analyses on whether certain algorithmic trading strategies are harmful to the interests of long-term investors; and
- How the agencies intend to “tag” high frequency traders over a certain volume threshold and use the data collected to gain a better baseline understanding about high frequency trading activities.
The Kaufman-Warner addition would also direct the SEC and CFTC to report to Congress within 180 days on the following:
- Whether the agencies should insist on “shock absorber” or circuit breaker mechanisms to prevent computer-driven trading from running amok without the intervention of human judgment;
- How the agencies intend to “tag” high frequency traders and use data collected about high frequency trading activities, along with a consolidated audit trail, to detect any manipulative trading strategies; and
- Whether certain electronic liquidity providers which are currently unregulated but purport to be acting like market makers should be required to maintain “fair and orderly markets.”
|5-7-10 Letter to Chairman Dodd.pdf||713.34 KB|