A newly formed specialist in market structure issues on Monday recommended to the Securities and Exchange Commission that it slow down its approval of new rules and order types, in order to avoid unexpected market disruptions.
KOR Trading, an Omaha firm led by former TD Ameritrade executive Christopher Nagy, said highly publicized market events such as the BATS Global Markets failed IPO in March, the Facebook IPO that was delayed and whose orders were not smoothly carried out by the Nasdaq Stock Market and the Knight Capital flood of mistaken orders on August 1 all “can be traced back to coding and order-type changes” that were filed with the SEC and got immediate approval with little or no comment.”
The SEC on Tuesday is holding a Market Technology Roundtable to try and identify the cause of errors in the BATS, Facebook and Knight cases and find ways to preclude recurrences.
Besides the call for a slower, more considered rule-making process, at least four individuals and organizations on Friday and Monday called for the SEC to add Eric Hunsader to the panelists appearing before it Tuesday.
Hunsader and his firm, market data aggregator Nanex.net of Winnetka, Ill., have been at the forefront of statistically identifying the emergence and causes of market disruptions from the Flash Crash of May 6, 2010, to the Knight Capital flood of erroneous orders on August 1.
In the case of the failed BATS IPO of March 23, Nagy and KOR Trading said that the problem was traced back to a single he issue was traced back to a single line of faulty computer code, updated in anticipation of the IPO.
“While BATS did institute rule filings which required expedited processing for commission approval” under the Dodd-Frank Wall Street Reform Act of 2010, “BATS subsequently submitted a filing and (got) immediate effectiveness of a proposed rule change to modify” a rule on auctions of exchange-listed securities on February 10th, 2012, 26 business days before the launch of the failed IPO.
In the case of Nasdaq’s botched Facebook IPO, “Nasdaq submitted many filings prior to the Facebook IPO,’’ Nagy said.
In one, Nasdaq’s filed and got immediate effectiveness of a rule to adopt a modification in the process for initiating trading of a security for an initial public offering on March 19, 2012.
That “required coding changes with Nasdaq from brokers and dealers to a specific order type who route to Nasdaq. Neither of the rules described above, nor Nasdaq’s filing on Rule 4753 in January 27th 12 which was also filed as immediate effectiveness, received any comment. ‘
In the Knight Capital case, the cause can be traced “to coding changes required as a result of NYSE’s new order-type entitled, Retail Liquidity Program.’’
The commission, KOR and Nagy say, realized “the complex nature of the program and delayed approval two times (the maximum allowed) until its final approval on July 3rd, 2012.”
“While one would surmise that there was ample time for testing and coding changes, consider that the rule was adopted on July 3rd and NYSE implemented the program on August 1st, just 19 business days post approval,’’ KOR and Nagy said in a comment letter filed Monday with the SEC.
