After the stress of the May 2010 Flash Crash and the more recent August 24 equity market swoon, market consultancy Tabb has made several recommendations as to how improve the strength of the market.
Tabb reported that market infrastructure risk has become as important as market structure risk, according to its new report, “Managing Market Structure Risk: Flash Back” commissioned by The Depository Trust & Clearing Corporation (DTCC). In the report, the consultancy recommended 13 specific areas for making the equity market better.
The report said that with average daily trades for the first eight months of 2015 versus the same period in 2005 increasing to 31.6 million trades from 10 million, the US equity national market system’s stability is as tied to market structure (the number of venues and types of market participants) as it is to market infrastructure (trading system coding and connectivity).
“The benefits of trading automation can be severely diminished without effective risk controls, leading to unintended malfunctions,” said Sayena Mostowfi, a TABB principal and head of equities research who wrote the 27-page, 11-exhibit research report. “Although industry regulators and market participants have put in place some effective safeguards, there are gaps that can be addressed through uniformity across safeguard rules (reference price calculations) and exchange functionalities (risk monitoring/detection, kill switches), while other gaps would benefit from consolidation and integration of existing tools, such as the DTCC centralized limit monitor and exchange kill switches.”
However, the report continued that for uniformity and consolidation to be feasible, there needs to be further reconciliation and mapping of market participant IDs and trade and clearing files across all venues.
According to Mostowfi, “None of these measures would be optimized without regular industry-wide testing and established communication protocols enabling market participants to strengthen operational muscle memory of disaster recovery procedures across asset classes.”
Also, Mostowfi added that while market participants can create their own pauses in uncertain market conditions, leading to a potential liquidity crisis, the focus should be on resolving the core issues and not just market structure regulation.
To access the report, please click here:
