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August 1, 2010

Freshen Up That Quote

By Michael Scotti

I recently sent an email to a friend--a retired trader. The email contained a photo from 1968 of an institutional block trading desk. The desk revealed an adding machine and a bank of phones, but no screens. I, of course, got a kick out of that. My friend responded that even a few years later, when he started trading, he'd have to travel a few doors down just to access a quote machine.

Michael Scotti, Editorial Director

That is the Ice Age compared with today, but it does highlight how far we've come. This month's cover story, "Not So Fast!" addresses some provocative questions about the issue of speed, which came to the forefront after the "flash crash" of May 6.

What makes for a fair market? What makes for an efficient market? Can the two co-exist? The answer must be "yes." And the Securities and Exchange Commission is wrestling with that now. At one end of this push-and-pull between fairness and efficiency is the SEC, the champion of the retail investor. On the other is the trading industry, which is battling to be ever more efficient, so that it can survive and be profitable in a world in which commissions--always, always--fall.

It is likely that change will result from the SEC's Concept Release. Many wonder if one decision from the SEC will be to slow down trading in some form. Some want that, and the SEC is thinking in that direction. One pre-emptive strike to avoid the next flash crash has been the move to marketwide circuit breakers. The circuit breakers are the industry's reaction to concern that markets are moving too fast.

But the hallmark of our markets has been their continuous nature. You can read in our Rules and Regs section about why some are calling for price bands of 10 percent around the price of a stock. This, essentially, would put a damper on erroneous trades and keep markets humming along, without the need for circuit breakers.

This is all uncharted territory. Both the industry and the SEC have their hands full. Cause and effect is a hard thing to prove. Is it flickering quotes that have given the retail investor a loss of confidence in the markets, or the flat returns for the last 10 years? Is it the high-frequency traders' fault they traded the way the French army fought in World War II, surrendering after the market began tanking on May 6? Of course not. Trading is trading, whether it is high-frequency or not. Traders will always look to protect themselves. The answers should only get better from here. Stay tuned and avoid trading on stale quotes if you can.


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