WASHINGTON, D.C.-The specter of the May 6, 2010 Flash Crash and the runaway algorithm of Knight Capital on August 1 of this year loomed heavily over the first panel of the Financial Markets Quality on Wednesday.
And one way to stop recurrences would be to institute a market-wide ‘kill switch,’ suggested the head of equity trading at T. Rowe Price, the Baltimore investment firm with $541.7 billion of assets under management.
But the head of operations at BATS Global Markets, which had its own fiasco in March involving technology that failed when it tried to sell its own shares on its own exchange on its own systems for the first time, called that a "knee-jerk’ reaction to the repeated technological burps of increasingly high-speed, automated markets.
The one-day conference was put together by The Center for Financial Markets and Policy at Georgetown University’s McDonough School of Business. The first panel, which was to discuss issues of securities quality, systemic risk to the markets and the role of regulators, brought together representatives from several of the largest exchanges.
It didn’t take long for the conversation to turn to sometimes painful reminiscences of the Flash Crash and the role that high-frequency trading possibly played in it. "Unfortunately, it takes something like the May 6 event to get the attention of the markets and regulators and move the market structure forward toward some positive changes," said Joseph Mecane, Executive Vice President and Co-Head of U.S. Listing and Cash Execution at NYSE Euronext.
While most panelists agreed that some of the regulatory rule changes in the wake of the Flash Crash have helped keep similar major events from happening in the two years since, they said regulators need to realize that they can’t legislate away any potential problems, especially those that market participants don’t see coming. "After an event, like the May 6 Crash, regulators and legislators in Congress wanted to make rules to say, in effect, ‘That will never happen again’", Mecane said, "And it’s really not effective to do that."
Andrew Brooks, Vice President and Head of Equity Trading at T. Rowe Price, said that government, of course, has a role in the markets, but the exchanges themselves should be better policemen too. "When things go wrong," Brooks added, "you have a situation where nobody wants to own the quote, and no one wants to own the market."
Eric Noll, Executive Vice President for Transactions Services at NASDAQ OMX Group, objected to that. "There is a grey line between what is a broker-dealer’s responsibility and what is an exchange’s responsibility."
Brooks rankled the exchange executives by suggesting that one solution to prevent a repeat of the Flash Crash in the future would be a market-wide "kill switch" that could immediately halt trading by an entity or entities across all exchanges. "That might be worth considering," he said.
No one can argue that there shouldn’t be better coordination, but the idea of a ‘Kill Switch’ sounds like a knee-jerk reaction," said Chris Isaacson, Senior Vice President and Chief Operating Officer of the BATS Exchange.
No one can argue that there shouldn’t be better coordination, but the idea of a ‘Kill Switch’ sounds like a knee-jerk reaction," said Chris Isaacson, Senior Vice President and Chief Operating Officer of the BATS Exchange.
The coordination, legal ramifications and technological hurdles of working out such a device as a market-wide ‘kill switch’ would be almost insurmountable, said Issacson.
Despite the lively discussion, the panel agreed that a more encompassing approach to smoothing out possible problems with how the exchanges and brokerages handle high-speed trading would be more beneficial for the market overall. "There have been too many Band-Aid approaches over the years," said Brooks.
NASDAQ’s Noll agreed. "I worry less about the complexity of the markets, and more about how we all should work together."
