Monday, May 10, 2010

SEC, Stock Exchanges Agree on Circuit Breaker Even Though They Don't Know What Caused the Plunge

Is the SEC clueless or pretending to be clueless so that it doesn't see the big elephant in the room (High Frequency Trading)?

Does that make sense to you? They don't know (or say they don't know) what caused it and probably won't know for weeks, but let's fiddle with the market circuit breaker right now and see what that will do in the next big freefall..??

SEC: Exchanges agree in principle to new rules (5/10/2010 AP via Yahoo Finance)

"NEW YORK (AP) -- The major securities exchanges put aside some of their differences Monday and agreed to coordinate trading rules to prevent stock plunges like last week's historic dive.

"The Securities and Exchange Commission said the six exchanges agreed in principle during a meeting with regulators to a uniform system of "circuit breakers." Those are restrictions that would curb trading when a stock index or individual stock or other security rises or falls to a specified level in the course of a trading day.

"Four days after the plunge that sent the Dow Jones industrials down to a loss of nearly 1,000 points in less than 30 minutes, regulators were still saying publicly that they did not know the exact reason for the drop. But there is a growing belief that the varying trading rules on different exchanges contributed to the intensity of the selling and the size of the market's slide.

"People familiar with the situation said regulators believe the disruption was caused by the way different exchanges manage their trades and rapid price swings. A definitive answer could take weeks because regulators are going through information from across the market by hand, said the people, who spoke on condition of anonymity because they were not authorized to discuss the investigation." [The article continues.]

The AP article tries to tell us that if only all exchanges have the same circuit breaker the freefall wouldn't have happened.

Well, we wouldn't know that, would we, until "next time"?

Besides, it seems it was the NYSE's circuit breaker mechanism that made the plunge much worse, by sweeping the sell orders into the other electronic exchanges.

In the meantime, the article does mention High Frequency Trading toward the end, in a totally neutral light, nowhere near even hinting it might have been the cause.

So, to recap, they don't know what happened, but let's put more regulations in to "protect investors". From what?

It's likely from being able to sell and get out of position when a disaster hits. Under the new regulations, all exchanges would slow down or shut down in the time of a crisis, preventing the investors from fleeing from the market. What a way to further fleece the investors in order to "protect" them.

Slowing down or shutting down "at the same time" may be problematic, too. With High Frequency Trading, we are talking milliseconds here.

HFT firms will simply write new and improved algorithms to take advantage of the slowdown mechanism. Without addressing predatory HFT and flash trading, putting in the uniform circuit breaker will probably do next to nothing in preventing a freefall we've experienced.


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