Reed: Technology Won’t Slow Down. Recalibration Needed.

WASHINGTON, D.C. — Shortly before he would lead a Senate Banking Committee hearing into computerized trading, Senator Jack Reed told the Security Traders Association that technology has to be looked at closely because the change it is bringing is speeding up.
The examination into computerized trading is necessary to prevent, like the stock market crash of 1987, a series of unintended but mutually reinforcing events that cause not just a blip – like August 1’s Knight Capital flood of erroneous orders — but real systemic failure, he said, in opening remarks at the STA’s 79th Annual Market Structure Conference here.
"Technology is not slowing down. It’s speeding up,’’ he said. Each new generation of technology now is “not five or six years. It’s five or six months. Maybe it’s five or six weeks.”
The core question of the committee’s hearings will be the potential for a systemic meltdown. But, he said, the panel will also look closely at:
* Fairness of systems in place.  Is everyone playing by the same rules? Does everyone understand the rules?
Capital formation. Is the long-term formation of capital and companies being helped by computer-driven technologies?
Reliability of algorithms. Can algos operate effectively in stressed market conditions?
He called the 1987 crash, where stocks lost 22% of their value in one day, a “close call,’’ that needs to be avoided again, in an era when technology is much more complex and its use not wholly understood.
 Recent technical incidents such as the flubbed Facebook IPO, the Knight incident and the May 6, 2010 flash crash are a warning that the technology being used to trade stocks has to be looked at closely, he said.
And the “improper headstart” given subscribers to two NYSE Euronext market feeds that prompted the first-ever penalty paid by an exchange to the Securities and Exchange Commission goes to the issue of fairness, he said.
He said suggestions that algorithms should be somehow reviewed before being deployed and a moratorium should be placed on the launching of new electronic trading venues will be taken up and considered.
But the review, which will look at types of orders that may favor some trading firms and other issues as well, is not likely to come to any conclusions, until after this election year is complete.