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May 2010

Thursday, May 27, 2010

Encouraging Noises from the SEC

Posted by John Bates

Washington, D.C., May 26, 2010 — The Securities and Exchange Commission today proposed a new rule that would require the self-regulatory organizations (SROs) to establish a consolidated audit trail system that would enable regulators to track information related to trading orders received and executed across the securities markets. http://www.sec.gov/news/press/2010/2010-86.htm

I support the SEC's intention to improve real-time market surveillance and establish a consolidated audit trail system. It's always been a worry that regulators do not have real-time access to all securities market data, but it's good to see that they are about to address the issue.


The SEC estimates it would cost the trading industry $4 billion to implement and $2.1 billion in annual maintenance to establish this system. But the US taxpayer is already fed up with the government using 'their' dollars to bail out banks and shore up an ailing financial system. They are unlikely to cheerfully approve of another government agency getting billions more of their dollars.

However, I'm not sure the solution has to be so costly. The markets have come a long way with standard protocols like FIX but also ways of normalizing heterogenous protocols in real-time. Time series database technology, to consolidate and retain all the information on quotes, orders and trades, has been scaling up for years to handle massive increases in volumes.  And low latency, high speed, monitoring technology exists and is already in place at some of these destination venues and trading participants.

I would love to see the SEC working together with other regulators, like CFTC to form a committee of market participants, exchanges, ECNs and market practitioners to hammer out a cost-effective and timely solution. May 6th could potentially happen again and the regulators must be prepared. I believe a solution could be achieved quickly and by using less taxpayer dollars than the SEC might initially think.

Tuesday, May 25, 2010

Is High Frequency Trading (HFT) Really Evil?

Posted by John Bates

I was very interested in Tim Bass' response to my posting Regulation: Don’t Throw the Baby Out With the Bathwater. You can read Tim's post here but in summary he feels that "the US economy (read individual investors) would be much better off if financial services firms (or anyone) were not permitted to use computers next to stock exchanges to seek split second “get rich quick” opportunities that the normal, traditional investor does not have. The only “economy” that benefits are entities that participate in this type of activity and the technology firms selling the hardware and software to make “all the madness” possible."


My response to Tim is as follows: I respect your views as always and understand where you're coming from. My view on this is that HFT is not driving the market big picture -- fundamentals will still do that. So people still invest in companies driven by good economics. HFT makes the market more efficient. And yes it does accentuate movements.

The point I was trying to make is that you can protect investors from some of the rapid movements that HFT can accentuate by having electronic safeguards -- like real-time pre-trade risk and real-time market surveillance. Sure I want to sell people more software - but there's a bit more to it. If I didn't work for Progress I'd still feel the same way as I do.

On the other hand Colin Clark, who had a lot of experience in real-time surveillance with his company Kaskad, posts that he doesn't blame CEP and HFT for the Flash Crash. Instead he cites issues with NYSE and market fundamentals. See his post here.

This topic definitely incites strong opinions. A lot of bankers I know often don't feel safe even admitting they are bankers in public in case they get lynched for causing such suffering in the economy!!

What do you think caused the Flash Crash? We set up a little vote which you can get to here



Monday, May 24, 2010

Regulation: Don't Throw the Baby Out With the Bathwater

Posted by John Bates


We are still feeling the repercussions of the "Flash Crash" in the markets. Both the SEC and CFTC have been trying to figure out what happened and what to do about it. Of course the Flash Crash threw salt in the open wound left open from the worst recession since the 20s -- which many still blame on greed in the Cap Markets space.

The CFTC is forming a panel to meet in July - a technology advisory committee that will hold hearings to help the agency look into issues such as co-location, swap execution facilities and high frequency trading. The first hearing is on July 14 when they will discuss high-frequency trading: read the article.

The CFTC said the committee will "discuss how technology is being developed across the industry, how the CFTC should oversee such technology, and what the future holds for technological advancements in our markets so the CFTC can stop playing catch-up, as it has for so long."

We welcome the CFTC hearings into high frequency trading. Regulators are in a tricky situation right now trying to balance populist anger against HFT firms with the need to keep our markets safe for investors. The CFTC and other regulators need to be able to police markets to prevent fraud and trading errors, while - at the same time - ensure that US markets remain competitive. We don't want to over-regulate and sacrifice business to looser regulator regimes; this would be tantamount to throwing the baby out with the bathwater.

Let's keep our economy strong. My motto with regard to regulation of trading: POLICE don't RESTRICT. But of course this means high quality policing in real-time, and this needs increased transparency and new approaches to markets surveillance across fragmented markets and real-time pre-trade risk management.