Review of latest Flash Crash report, part 1.
The eight-member panel suggested the SEC consider forcing
the banks, hedge funds and others that facilitate stock-trading
away from the public exchanges to give investors a better price
by a minimum amount.
Price fixing. Would create more problems than it solves. Can't be realistically implemented unless an exchange tax is applied to every transaction.
It also said stock pauses and limit-up/limit-down price
bands would help reduce investor fears about how markets react
in times of uncertainty.
If the tape is paused, how does one restart it without a chaotic state developing? They're making these assertions under quaint and narrow assumptions, assumptions whose bounds are always exceeded in "times of uncertainty".
"What market regulation now has to do is limit
uncertainty," said Maureen O'Hara, professor of finance at
Cornell University and member of the flash crash panel.
We were talking about academic intellectuals. You can see it here. This person has no clue about how markets work, yet her academic position grants her qualification to interfere in markets. As readers here know "certainty" or uncertainty" can't be quantified, so how can be it regulated? Markets can't work without uncertainty, and the greater the uncertainty they have, the safer they are. Why? Because then INDIVIDUALS don't throw risk to the wind like they did with RE in 2006.
"You limit uncertainty by limiting the amount of movement a price can have before it falls off the map."
In fact, the exact opposite is true. Further, "falls off the map" is symbolic of a fixed price regime only. You can see what her academia has done for her, even while she teaches her students how desirable it is to have free markets.
The panel wants regulators to consider a so-called "trade
at" order routing rule -- something that would hurt the growing
ranks of "dark pools" where trading is done anonymously.
Let me explain the "trade at" rule.
Let's say that the bid is 24.10 and the ask, 24.13. Last, 24.11 on a zero plus tick. With no offers in the spread and no instantaneously available market order matches available, your round lot market order to buy goes off at 24.1299. What happened? Who undercut the MM's offer at 24.13? Why didn't the MM complain to the exchange? A high frequency computer generated order was matched to your order because the computer sees the incoming order flow since it's in the computer's buffer as it is in all computers similarly configured. The match is considered valid because there was price improvement even though the execution distorts the function of the MM. E.g., after the match where should machines or MMs place the ask? The current algos automatically reset the best ask to the previous ask unless an improvement is instantaneously available. A trade at rule would force the execution at 24.13. I'm in favor of it because I believe all BAs should be set by humans exclusively. How does one do that with the high density of order flow? One tells the exchanges to stop the compensation procedure that's based on number of trades executed. The MMs don't care even though each month they lose more and ore of their market, because MM firms run the execution computers and implement high frequency trading. |
