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Flash Crash – HFT Not To Blame so What Next?

Much to the SEC’s consternation, the recent report detailing the causes of the May 6th, 2010 Flash Crash has failed to indict High Frequency Trading as the cause.


How does all of this tie in with the SEC’s bid to build a huge consolidated audit trail? (CAT) – well, after a lot of thought, I don’t really know. And I haven’t read a lot from anyone that purports to know either. All I know is the SEC wants a lot of money to build it because, well, we need it to watch all of those evil HFT firms out there disrupting the market.


So here’s a relevant question, if HFT wasn’t to blame for the Flash Crash, then what was? I thought Reg NMS was supposed to ensure that, no matter how many exchanges enter the fray, we were all supposed to get the best price – regardless of where the order executed. And that all of the exchanges would cooperate and there would be peace and harmony in the valley. Guess what, that’s not working.  IT would seem that the ‘structure’ of the market needs a little attention.


So, if HFT isn’t to blame for the crash, and it boils down to some idiot shorting billions of dollars of futures in one fell swoop, then something else must be broken. And the SEC’s CAT will fix it, right? Wrong. All the SEC’s CAT proposal will do once it’s live in 4 years after billions of dollars is yet again confirm that HFT isn’t responsible for any other flash crashes as well. So why spend the money?


Could it be, that the SEC, who didn’t even have the expertise required to answer the basic question, “WTF happened to the market please” could be looking to build an empire? Is this the same organization who seems to dispense different levels of disciplinary action based upon how deep the offending firms pockets are? Say it isn’t so!  Asking for billions of dollars represents a multiple over the SEC’s current operating budget.  Just what exactly do they plan on doing with all that money?  And how many firms have offered to build the capabilities for a lot less?  If the SEC doesn’t even know what the problem is, how do they know how much money to ask for and what system needs to be built?  Madness.


I’d really like to hear how the SEC’s going to fix the market’s structure and prevent this from happening again.  Then I’d like to see actual enforcement of the laws on the books and see people who violate these laws go to jail instead of write checks.  In short, what I’d like to see is the SEC start doing their job before asking for billions of dollars to do something that wouldn’t have prevented what happened in the first place.  Please.  Does the SEC and Mary Schapiro think we’re all just that stupid?


So not only am I not going to go on record with the above (go back and read it again – the SEC isn’t doing their job) but I’m always going to say that event processing technology can’t prevent future occurrences of Flash Crash (and CEP vendors who think they can really don’t know what they’re talking about).  Several vendors  (YOU KNOW WHO YOU ARE) are all too happy to not point out that the emperors new clothes, well, need some additional tailoring as they jump on the SEC and CFTC’s bandwagon, hoping for additional, regulation sourced revenue.


I believe that if the SEC started doing their job again, and investor confidence returned to the equity markets, maybe we’d see a return to previous volumes.  Because right now, at the volume levels out there today, there’s going to be blood in the streets as firms collapse under the lack of trading.  All the SEC has to do is their job.  And be 1/10th as vocal about it as their request for billions of hard earned tax payers dollars.

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Colin Clark is the CTO for Cloud Event Processing, Inc. and is widely regarded as a thought leader and pioneer in both Complex Event Processing and its application within Capital Markets.

Follow Colin on Twitter at http:\\twitter.com\EventCloudPro to learn more about cloud based event processing using map/reduce, complex event processing, and event driven pattern matching agents. You can also send topic suggestions or questions to colin@cloudeventprocessing.com